FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - Pure Play On Rising Visitor Arrivals To Singapore
- FAR EAST HOSPITALITY TRUST (SGX:Q5T) is a pure play on Singapore hospitality. It has a resilient portfolio of nine hotels and four serviced residences with fixed rents accounting for 70% of master lease rental. It has a visible pipeline of nine hospitality properties from sponsor Far East Organisation, which could expand its portfolio by 58%.
- Far East Hospitality Trust’s share of project-related costs in a 30:70 JV to develop three Sentosa hotels is S$133.1m, equivalent to a low initial cost of S$522,000 per key. Its P/B of 0.78x is one of the lowest in our universe of S-REITs.
- Initiate coverage with BUY and target price of S$0.82.
Pure play on Singapore hospitality.
- FAR EAST HOSPITALITY TRUST (SGX:Q5T) owns nine hotels and four serviced residences in Singapore. It has a balanced 80:20 mix of hospitality properties targeting short-term stays at hotels (average length of 3 days) and long-term stays at serviced residences (29 days). It has a resilient portfolio as fixed rent accounts for 70% of master lease rental. Eleven of its 13 hospitality properties are located within the Core Central Region.
- Five hotels, namely The Elizabeth Hotel, The Quincy Hotel, Village Hotel Bugis, Oasia Hotel Novena and Orchard Rendevous Hotel (47% of portfolio valuation), are located near major hospitals that are popular among medical tourists.
Visible acquisition pipeline from sponsor Far East Organisation.
- Sponsor, the Far East Organisation (FEO), has granted Far East Hospitality Trust ROFR over nine hospitality properties, which includes five hotels (1,168 rooms) and four serviced residences (599 units). Pricing for these hospitality properties from its sponsor would be more favourable compared to competitive bidding in the secondary market.
- Based on valuation of S$850,000 per key, the nine ROFR properties are worth S$1.5b and would expand Far East Hospitality Trust’s portfolio by 58%.
Embarked on first development project on Sentosa Island.
- Far East Hospitality Trust has entered into a 30:70 JV with sponsor Far East Organisation to develop three new hotels, namely Village Hotel Sentosa, Outpost Hotel Sentosa and Barracks Hotel Sentosa, on a 60-year leasehold heritage hotel site located at Artillery Avenue, Sentosa. Far East Hospitality Trust’s share of estimated project-related costs is S$133.1m, which is equivalent to a low initial cost of S$522,000 per key.
- We estimate value created at S$80.8m (potentially boosting NAV/share by 4.2 cents or 4.9%) if the three hotels are subsequently classified as investment properties under master lease and valued on a completed basis at S$846,000 per key.
Trading at steep 22% discount against NAV.
- Far East Hospitality Trust trades at P/B of 0.78x, the lowest in our universe of S-REITs. We believe the discount is unwarranted, given good corporate governance and strong sponsor in Far East Organisation.
- Far East Hospitality Trust provides attractive yield spread of 4.5%, which 1xSD above long-term mean.
Investment Highlights
PURE PLAY ON SINGAPORE HOSPITALITY
Totally devoted to Singapore.
- Far East Hospitality Trust owns nine hotels and four serviced residences in Singapore. It has a balanced 80:20 mix of hospitality properties targeting short-term stays at hotels (average length of 3 days) and long-term stays at serviced residences (29 days). Its hotels and serviced residences are under master leases with tenure of 20 years with option to renew for another 20 years. It has a resilient portfolio as fixed rent accounts for 70% of master lease rental.
- It has a balanced portfolio of hospitality assets targeting short-term stays at hotels and long-term stays at serviced residences. Far East Hospitality Trust benefits from a cyclical pick-up in the hotel portfolio during a market upswing (fixed rent accounts for about 70% of master lease rental). The serviced residences portfolio provides stability of income from corporate customers seeking long-term accommodation (average length of stay: 29 days).
Hospitality properties primarily located downtown.
- Eleven of Far East Hospitality Trust’s 13 hospitality properties are located within the Core Central Region, covering the Orchard Road area, Marina Bay, Singapore River and the Civic & Cultural Districts. They attract many corporate travellers due to the country’s positioning as a key financial centre and regional hub with more than 7,000 MNCs. Hospitality properties located in the Central Region are within walking distance from MRT stations.
Benefitting from medical tourism.
- Five of the hotels, namely The Elizabeth Hotel, Village Hotel Bugis, Oasia Hotel Novena, Orchard Rendevous Hotel and The Quincy Hotel (47% of portfolio valuation), are situated within walking distance of major hospitals popular among medical tourists.
- Oasia Hotel Novena, in particular, is situated in the heart of the Novena area, which has one of the highest concentrations of hospital beds in Singapore. The Elizabeth Hotel and The Quincy Hotel are near Mount Elizabeth Hospital while Orchard Rendevous Hotel is near Gleneagles Hospital. Village Hotel Bugis is near Raffles Hospital.
Catering to value-conscious travellers.
- Far East Hospitality Trust focuses on mid-tier and upscale hospitality properties which are more resilient during economic downturns when corporate customers tighten budget for travel. Far East Hospitality Trust could also capitalise on the growing outbound travel markets in Asia. Its hotels are well patronised by tourists from China, India, Indonesia and Malaysia.
Best proxy to hospitality industry in Singapore.
- Far East Hospitality Trust fully benefits from rising visitor arrivals to Singapore. The hospitality industry will gain from the slew of government initiatives to promote tourism and develop new tourist attractions. The supply of new hotels is also limited for the next three years. Far East Hospitality Trust fully benefits from the positive industry dynamics in the hospitality industry.
VISIBLE ACQUISITION PIPELINE FROM SPONSOR FAR EAST ORGANISATION
Support from well-established sponsor.
- Far East Organisation, the sponsor of Far East Hospitality Trust, was established since 1960 and has grown to become the largest private property developer in Singapore.
Oasia Downtown was the first injection from sponsor.
- Far East Hospitality Trust completed the acquisition of Oasia Hotel Downtown, a 314-room upscale hotel in Tanjong Pagar with 65-year leasehold, from Far East SOHO for S$210m in Apr 18. It is a relatively new hotel that commenced operations in Apr 16. The hotel would appeal to business travellers due to its close proximity to the CBD (near Robinson Road and Shenton Way). The Tanjong Pagar MRT station is within walking distance. It is also near the Greater Southern Waterfront.
- The transaction illustrates the benefits of acquiring from its sponsor, compared to purchases from the secondary market. Far East Hospitality Trust was able to acquire Oasia Downtown at S$668,000 per key, compared to prevailing transaction prices of S$1.0m per key then. Interests are aligned and Far East Organisation benefitted from Far East Hospitality Trust’s expansion as well.
Acquisition of Oasia Downtown was DPU-accretive.
- Oasia Downtown will be leased back to Far East SOHO, a member of Far East Organisation, for an initial 20 years with an option for another 20 years under a master lease agreement. The fixed rent under the master lease is S$6.5m per year (fixed rent accounted for 63.6% of total rental payment in 9M17). The variable rent is based on 33% of gross operating revenue plus 25% of gross operating profit minus fixed rent. The acquisition is DPU-accretive by 4%, based on pro-forma 9M17 financial performance.
Another nine hospitality properties in the acquisition pipeline.
- Far East Organisation provides Far East Hospitality Trust with access to an acquisition pipeline of hospitality properties in Singapore. It has granted Far East Hospitality Trust right of first refusal (ROFR) over nine hospitality properties, which include five hotels (1,168 rooms) and four serviced residences (599 units). The nine hospitality properties have a total of 1,767 rooms, vs Far East Hospitality Trust’s existing portfolio of 3,143 rooms. Pricing of hospitality properties acquired from its sponsor would be more favourable compared to competitive bidding in the secondary market.
- Based on valuation of S$850,000 per key, the nine ROFR properties are worth S$1.5b and would expand Far East Hospitality Trust’s portfolio by 58%.
JOINNING FORCES WITH FAR EAST ORGANISATION TO DEVELOP THREE HOTELS ON SENTOSA ISLAND
Participating in its first development project.
- Far East Hospitality Trust has entered into a 30:70 JV with Far East Organisation to develop three new hotels, namely Village Hotel Sentosa (experiential stay for families), Outpost Hotel Sentosa (stylish upscale hotel) and Barracks Hotel Sentosa (luxury suites in colonial settings), on a 60-year leasehold heritage hotel site located at Artillery Avenue, Sentosa. Far East Hospitality Trust’s share of estimated project-related costs is S$133.1m.
Valuing the three hotels on a completed basis.
- Far East Hospitality Trust’s investment in the three hotels represents initial cost of S$522,000 per key, which is much lower than transacted price of S$211m or S$981,000 per key for Sentosa Resort & Spa. The average transacted price in the secondary market was S$846,000 per key during 2013-14.
- The 30% stake in the JV is currently valued at cost. We estimate value created at S$80.8m (potentially boosting NAV/share by 4.2 cents or 4.9%) if the three hotels are subsequently classified as investment properties under master lease (for example, after Far East Hospitality Trust acquires the remaining 70% stake) and valued on a completed basis at S$846,000 per key.
Valuation
Initiate coverage with BUY.
- Our target price of S$0.82 is based on DDM (required rate of return: 6.75%, terminal growth: 2.0%).
Yielding a rich harvest.
- Far East Hospitality Trust provides attractive yield spread of 4.5%, which is 1SD above its long-term mean.
Trading at steep 22% discount against NAV.
- Far East Hospitality Trust trades at P/B of 0.78x, one of the lowest in our universe of S-REITs. We believe the discount is unwarranted, given good corporate governance and strong sponsor in Far East Organisation.
Jonathan KOH CFA
UOB Kay Hian Research
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Peihao LOKE
UOB Kay Hian
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https://research.uobkayhian.com/
2019-07-18
SGX Stock
Analyst Report
0.82
SAME
0.82
