Far East Hospitality Trust - DBS Research 2019-02-14: A Rendezvous Not To Be Missed

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - A Rendezvous Not To Be Missed

Far East Hospitality Trust’s 4Q18 DPU of 1.00 Scts (+3.1% y-o-y) in line with expectations.
Results boosted by acquisition of Oasia Hotel Downtown and 7.5% y-o-y jump in 4Q18 hotel RevPAR.
Recovery in DPU to continue over next few years on multi-year upturn in the Singapore hospitality market.

We maintain our BUY call with a Target Price of S$0.70 for FAR EAST HOSPITALITY TRUST (SGX:Q5T).
The moderation of growth expectations for the Singapore hospitality market led to a correction in Far East Hospitality Trust’s share price in 2018. However, with Far East Hospitality Trust showing evidence that DPU is now on a recovery path after declines over 2015-2017, we believe investor confidence should progressively return.
Finally, we are bullish on Far East Hospitality Trust as it is attractively priced, trading at c.0.8x P/BV and 6.5% yield.

The market is cautious on Far East Hospitality Trust given uncertainty over the sustainability of its distributions. While acknowledging the challenges faced by Far East Hospitality Trust’s serviced residences following the reduction in the minimum stay for residential buildings from 6 to 3 months, and downgrades to earnings expectations given macro uncertainties, this risk has been priced in given that Far East Hospitality Trust already trades at a steep discount to book value, in our view.
The serviced residences only represent 12% of revenue, and Far East Hospitality Trust has consistently boosted occupancy for the serviced residence portfolio to the mid to high 80’s from high 70’s to low 80’s over the past few quarters.
We also believe consensus is ignoring the expected recovery in the Singapore hotel portfolio as demonstrated by a 7.5% y-o-y increase in revenue per available room (RevPAR) in FY18.

After the acquisition of Oasia Hotel Downtown in early 2018, we understand Far East Hospitality Trust is engaged with its Sponsor on potential acquisitions. Any acquisition provides further upside to our earnings and DPU estimates.

We retain our DCF-based Target Price to S$0.70. With more than 15% total return over the coming year, we maintain our BUY call.

The risk to our positive view would arise from slower demand ore aggressive pricing by the newly opened hotels.

Far East Hospitality Trust reported 4Q18 DPU of 1.00 Scts which was up 3.1% y-o-y. This translated to FY18 DPU of 4.00 Scts in line with our 4.00 Scts estimate.
The robust end to the year was mainly driven by the acquisition of Oasia Hotel Downtown, completion of the renovation at Orchard Rendezvous Hotel, general improvement in the hotel portfolio and turnaround of the serviced residence properties.
4Q18 revenue and NPI jumped 12.4% and 13.9% y-o-y respectively to S$28.9m and S$26.3m respectively. The results could have been better if not for a fall in rental rates which resulted in 2.4% y-o-y decline in revenue to S$5.5m for the commercial premises.
The slow 3.1% y-o-y growth in 4Q18 DPU is largely due to higher borrowing costs associated with the acquisition of Oasia Hotel Downtown.

The improvement in revenue per available room (RevPAR) since the start of the year (up 3-7% y-o-y over 1Q18-3Q18) continued into 4Q18 with RevPAR jumping 7.5% y-o-y to S$142. On full year basis RevPAR came in at S$144, up 6.2% y-o-y.
The increase in 4Q18 RevPAR was led by an 0.8ppt rise in occupancy (86.2% vs 85.4% in 4Q17) and 6.5% y-o-y jump in average daily rate (ADR of S$165 vs S$155 in 4Q17).
The stronger performance was due to an uptick in overall market demand with a positive impact from the addition of Oasia Hotel Downtown and recent renovations at Orchard Rendezvous Hotel (previously known as Orchard Parade Hotel).
We understand stripping out the impact of Oasia Hotel Downtown, 4Q18 RevPAR was still healthy, up 4% y-o-y. RevPAR for Rendevous Orchard Hotel rose by 5% y-o-y after the recent renovations.
For 4Q18, Far East Hospitality Trust’s overall portfolio RevPAR outperformed its Singapore focused hospitality peers with CDL HOSPITALITY TRUSTS (SGX:J85)’s and OUE HOSPITALITY TRUST (SGX:SK7)’s 4Q18 RevPAR only higher by 2.6% and 1.8% y-o-y to S$160 and S$212 respectively.

Following the declines in revenue per available unit (RevPAU) over the past couple of years with the exception of a 7% y-o-y jump in 1Q18, 4Q18 showed some signs of a potential recovery ahead for the serviced residences portfolio.
4Q18 RevPAU rose 7.5% y-o-y to S$179, mainly due to 6.1 ppt improvement in occupancy to 84.3% offsetting the 0.3% y-o-y dip in ADR to S$165.
For FY18, RevPAU rose marginally to 0.9% y-oy to S$177. The improvement in occupancy to 84.1% from 80.0% in FY17 was offset by 4.0% y-o-y decline in ADR to S$210.
Over the past few quarters, Far East Hospitality Trust has consistently boosted occupancy to the mid to high 80’s from high 70’s to low 80’s using different sales channels. Thus, we remain confident that Far East Hospitality Trust can sustain such healthy occupancies going forward.

On a back of c.1% increase in average valuations, Far East Hospitality Trust’s gearing dipped to 40.1% from 40.3% at end 3Q18. We understand due to a change in valuers, cap rates for the serviced apartment portfolio fell by 25bps, offset by a 25bps increase in cap rates for several hotels. The hotels are now valued using a cap rate of 4.75-5.25% with the serviced apartments at 3.25-3.75%.
The higher valuations also contributed to a slight increase in NAV per unit to S$0.8759 from S$0.8694 at end 4Q17.
Going forward, we understand that Far East Hospitality Trust’s valuation for its 30% stake Sentosa hotel JV will likely be valued at cost rather than on a completion basis, thus Far East Hospitality Trust’s gearing will be artificially elevated. To manage its gearing, Far East Hospitality Trust also announced that it plans to offer a DRP for its DPU in 4Q18. The first phase of the hotel development will start in April 2019 with second phase later in the year.
Due to higher benchmark interest rates, average cost of debt rose to 2.7% from 2.6% and 2.5% at end 3Q18 and 4Q17 respectively.
Furthermore, after entering into additional interest rate swaps, the proportion of fixed rate debt increased 63.8% from 54.3% in 3Q18.

Post 4Q18 results, we raised our FY19F DPU by 1% owing to healthy occupancy levels for the serviced residences thus far but maintained our target price at S$0.70.
Nevertheless, with prospects of a multi-year recovery in the Singapore hospitality market and attractive forward yield of 6.5%, we reiterate our BUY call.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-02-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.700 SAME 0.700