FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - 3Q19 Serviced Residences Outperform, Hotels Catching Up
- Far East Hospitality Trust’s 3Q19 DPU increased 14.3% q-o-q to 1.04 S cents. Occupancy for hotels improved 1.6ppt y-o-y to 92.3% due to higher traffic for leisure travellers. ADR for serviced residences increased 4.4% y-o-y and 4.7% q-o-q due to shorter-stay bookings at higher room rates.
- Far East Hospitality Trust will benefit from more MICE activities in 2020, coupled with limited supply of new hotel rooms. We like Far East Hospitality Trust as a pure play for Singapore hospitality sector. Valuation is attractive with 2020F distribution yield at 5.8% and P/B at 0.81x.
- Maintain BUY. Target price: S$0.86.
FEHT 3Q19 RESULTS
- FAR EAST HOSPITALITY TRUST (SGX:Q5T)’s distributable income grew 1.5% y-o-y and 16.2% q-o-q in 3Q19. DPU was 1.04 S cents, down 1.0% y-o-y, due to dilution from Distribution Reinvestment Plan (DRP). 3Q19 results were slightly ahead of our DPU forecast 0.96 S cents. See Far East Hospitality Trust Dividend History; Far East Hospitality Trust Announcements.
Hotels: Occupancy crossed the 90% mark.
- Occupancy for its hotels portfolio improved 1.6ppt y-o-y to 92.3% despite an absence of major city-wide events (3Q18 benefitted from the 51st ASEAN Ministerial Meeting) and weakness in corporate demand. Far East Hospitality Trust benefitted from stronger traffic during the peak leisure travel season. The proportion of revenue contributed by leisure/independent customers expanded 0.8ppt y-o-y to 65.5%.
- On a 8M19 basis, visitor arrivals to Singapore from China has grown 5.1% y-o-y, but visitor arrivals from Indonesia, Malaysia and India declined 0.5%, 0.4% and 2.0% y-o-y respectively. Far East Hospitality Trust took in more forward bookings (lower rated leisure business) after a dismal 2Q19. Thus, it did not benefit as much from the diversion of traffic from Hong Kong, and RevPAR was flat y-o-y at S$152.
Serviced residences: Continued shift towards shorter-stay bookings.
- Far East Hospitality Trust’s serviced residences portfolio benefitted from shorter-stay bookings at higher room rates (for example, 1-week stay for families on vacation). The proportion of revenue contributed by leisure/independent customers expanded 4.5ppt y-o-y to 28.1% while corporate customers narrowed 4.5ppt y-o-y to 71.9%.
- Far East Hospitality Trust saw growth from corporate customers from FMCG, services and logistics sectors. Average occupancy improved 1.0ppt y-o-y to 88.2%. ADR ased 4.4% y-o-y and 4.7% q-o-q. Thus, RevPAR increased 5.7% y-o-y and 12.7% q-o-q to S$196.
Maintains average cost of debt at 2.9%.
- In Oct 19, Far East Hospitality Trust extended a 2-year S$100m term loan due to mature in Apr 20 to a 2.5-year S$60m term loan and 5-year S$40m term loan. The weighted average debt-to-maturity was extended from 3.2 years to 3.5 years. There are no other term loans maturing in 2019 and 2020.
STOCK IMPACT
Pure play on rising visitor arrivals to Singapore.
- Far East Hospitality Trust benefits from the government’s initiatives to promote tourism and develop new tourism attractions. The new supply of hotel rooms is estimated to increase by 1.9% (1,284 rooms) in 2019, and 1.2% (789 rooms) in 2020, which is relatively moderate compared with the past few years.
- For hotels, Far East Hospitality Trust aims to increase ADR while maintaining occupancy. For serviced residences, Far East Hospitality Trust aims to increase occupancy by tapping on shorter-stay bookings. Management targets to achieve gradual increase in RevPAR of 3% in 2020.
Opportunities for AEI.
- Management plans to embark on AEI for hotels in the Orchard area to compete against newly-renovated Orchard Hotel and Yotel Singapore. It will also consider AEI for serviced residences, such as Village Residence Clarke Quay and Village Residence Robertson Quay.
More MICE activities in 2020.
- Management sees more MICE activities, including specialised IT conferences. International Trademark Association Annual Meeting will be held in Apr 20 while Lions Clubs International Convention will be held in Jun 20.
- Management aims to garner more bookings from its own Village and Ossia websites (installed new booking engine), which has resulted in double-digit increase in direct bookings.
Sentosa hotels benefit from development of Greater Southern Waterfront.
- The Village Hotel and The Outpost Hotel in Sentosa officially opened in Apr 19 (The Barracks Hotel Sentosa will open later in Dec 19). Occupancy at Village Hotel is about 80% with ADR around S$200 (RevPAR about S$160).
- Management will step up marketing for Outpost Hotel after completing further renovation of its roof-top restaurant and deck pool. The remaining 70% stake in the three Sentosa hotels could be injected into Far East Hospitality Trust in 2021.
Potential easing of regulations for serviced residences.
- URA has initiated an industry consultation to review the minimum length of stay at serviced residences. URA has recently reduced the use of private residential properties for short-term accommodation from six months to three months. This augurs well for minimum stay at serviced residences to be reduced from seven days to three days.
EARNINGS REVISION/RISK
- We raised our DPU forecast for 2019 by 2.7% and 2020 by 3.6% due to higher occupancy for hotels and higher ADR for serviced residences. See Far East Hospitality Trust Dividend History.
VALUATION/RECOMMENDATION
Maintain BUY.
- Our target price of S$0.86 is based on DDM (required rate of return: 6.25%, terminal growth: 1.5%).
- See Far East Hospitality Trust Share Price; Far East Hospitality Trust Target Price.
Yielding a rich harvest.
- Far East Hospitality Trust provides attractive 2020 distribution yield of 5.8%. The yield spread between Far East Hospitality Trust and 10-year Singapore government bond is 4.2%, which is about 1SD above its long-term mean.
Trading at steep 19% discount against NAV.
- FEHT trades at P/B of 0.81x, one of the lowest in our universe of S-REITs. We believe the discount is unwarranted, given good corporate governance and strong sponsor in FEO.
SHARE PRICE CATALYST
- Improvement in RevPAR driven by limited supply.
- Yield-accretive acquisitions, including injections from sponsor FEO.
- Acquiring the remaining 70% stake of three Sentosa hotels from FEO..
Jonathan KOH CFA
UOB Kay Hian Research
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Peihao LOKE
UOB Kay Hian
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https://research.uobkayhian.com/
2019-10-31
SGX Stock
Analyst Report
0.86
UP
0.820
