Far East Hospitality Trust - Maybank Kim Eng 2019-02-14: Recovery Gaining Traction


Far East Hospitality Trust - Recovery Gaining Traction

4QFY18 recovery; RevPAR ramp-up ahead

  • We hosted an NDR for FAR EAST HOSPITALITY TRUST (SGX:Q5T) in Singapore following its 4QFY18 results. Key highlights include:
    1. drivers of the recovery in 4QFY18 results;
    2. positive growth outlook for its Singapore hotels and serviced residences into FY19-20; and
    3. DPU growth levers from its sponsor’s assets in the medium term.
  • We fine-tuned our estimates and marginally lowered FY19/20E DPUs (2-4%) on higher interest expense and introduced FY21. Our DDM-based SGD0.75 Target Price (COE: 7.7%, LTG: 2.0%) is unchanged.
  • We forecast a 5% recovery in hotel RevPARs and a ramp-up of three Sentosa properties from 2H19 y-o-y to anchor a 6% DPU CAGR in FY19-20E.
  • We see upside potential from its higher Singapore RevPAR sensitivity and sponsor’s ROFR pipeline. BUY.

Recovery gained traction in 4Q18

  • Revenue growth was 12.4% y-o-y in 4Q18 driven by both its hotel and serviced residence (SR) segments on the back of stronger occupancies and RevPARs/RevPAUs. The improvement in its hotels portfolio with RevPAR up 7.5% y-o-y in 4Q18 and 6.2% y-o-y for FY18 reflects the recovering sector fundamentals, led by a 6.2% y-o-y increase in tourist arrivals in 2018.
  • Meanwhile, Far East Hospitality Trust's SRs witnessed a sharp turnaround with RevPAU up 7.5% y-o-y vs. -3.4% and -5.7% over 1Q-3Q driven by stronger occupancies (up y-o-y from 78.2% to 84.3%).

Growth momentum into FY19-20

  • Management expects FY19-20 growth momentum to be strengthened by easing supply (to 1.5% in 2018-20E from 5.1% CAGR 2013-17). This will be further supported by the completion of renovation works and rebranding efforts at its Orchard Rendezvous hotel where overall RevPAR has been boosted by 10%, with higher corporate demand contribution.
  • We forecast RevPAR growth of 5-6% in 2019-20E, on stronger volume growth and a pick-up in yields.

Sponsor’s assets - medium-term DPU growth levers

  • We see medium-term DPU growth levers from its sponsor’s ROFR pipeline of 1,767 rooms as the properties scale up. They include its sponsor’s remaining interests in three Sentosa hotels – The Village (at 606 rooms), Outpost (193), and Barracks (40) - and Oasia West Residences, a 116- room SR.
  • The first two properties are set for official opening from Apr 2019, and their pricing strategies are correct in our view compared to other higher-priced accommodation options on Sentosa island.

4Q18 results in line with consensus; slight miss vs. MKE

  • Far East Hospitality Trust’s revenue rose 12.4% y-o-y, while NPI growth was stronger at +13.9% y-o-y, in line with consensus but 6% below our estimate of +17.5% y-o-y. This was driven by increases in occupancies, for its hotels, which were up y-o-y from 85.4% to 86.2%, and its SRs, which rose y-o-y from 78.2% to 84.3%.
  • Hotel RevPAR jumped 7.5% y-o-y in 4Q18 and 6.2% y-o-y for FY18. Excluding the Oasia Downtown, whose acquisition was completed in Apr 2018, hotel RevPAR rose 4.0% y-o-y in 4Q18 and 3.5% y-o-y for FY18. This was in line with expectations and the overall market performance.
  • Its rebranding of Orchard Rendezvous - previously Orchard Parade Hotel – from Oct should support hotel RevPARs after its AEI with a higher contribution from corporate travellers.

Portfolio valuation up on Oasia Downtown deal

  • Far East Hospitality Trust’s AUM has risen by 10.6 y-o-y% to SGD2.6b as of end-Dec 2018 with the Oasia Downtown acquisition.
  • There was a change in valuers to Savills, which led to increased cap rate assumptions for Far East Hospitality Trust’s hotels by about 25bps to 4.75-5.25%, while Knight Frank has lowered inputs on cap rates for its SRs to yield 3.25-3.75%.

Balance sheet stretched for now

  • Aggregate leverage was stable at 40.1% following its fully-debt-funded Oasia Downtown purchase completed in Apr 2018. The dividend reinvestment plan is a sound step, with about SGD22m taken up (at SGD11m per quarter, according to management), although its balance sheet appears stretched for now on any potential larger deals.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-02-14
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