Far East Hospitality Trust - CGS-CIMB Research 2021-03-23: A Redevelopment Of Central Square?


Far East Hospitality Trust - A Redevelopment Of Central Square?

  • Central Square could be redeveloped. Assuming Far East Hospitality Trust (SGX:Q5T) divests Central Square by end-2021, its gearing level could fall to a very healthy 34%.
  • We expect Far East Hospitality Trust to deliver stable DPU in FY21-22F and its DPU recovery to accelerate in FY23F given the positive COVID-19 vaccine developments.
  • Reiterate ADD with a higher DDM-based target price of S$0.74, implying 0.95x P/BV.

Outline advice on redevelopment of Central Square (CS)

  • Far East Hospitality Trust announced that it has received an outline advice from the Urban Redevelopment Authority (URA) in relation to the redevelopment of Central Square (Village Residence Clarke Quay), comprising a serviced residence (128 rooms) and commercial spaces, including office (NLA 2,296 sqm) and retail units (NLA 2,321 sqm).
  • The outline advice was issued by URA under an incentive scheme and is intended to rejuvenate the precinct with an integrated development. The scheme involves a potential rezoning and uplift in gross floor area, subject to specific approvals from URA and other relevant authorities.

Assuming a divestment of CS, gearing could go down to 34%

  • Far East Hospitality Trust said it will explore various options, including a possible divestment to undertake the proposed redevelopment. There was no timeline given and the commercial and hospitality spaces of the asset will continue to be in operation in the meantime.
  • Central Square (CS) accounted for 7.8% of Far East Hospitality Trust’s portfolio AUM in FY20. In the event that Far East Hospitality Trust decides to divest the asset to pare down gearing by end-2021F, we estimate our FY22-23F DPU will be reduced by ~2%, while gearing will fall from 38.5% to ~34%, based on our estimates, making Far East Hospitality Trust one of the most lowly-geared REITs in Singapore.

Delivering stable DPU while awaiting strong recovery in FY23F

  • The recovery of Far East Hospitality Trust hinges on the pace of Singapore reopening its borders. As the tourism industry is an important pillar of the economy, we believe the government is eager to open Singapore’s borders but is also wary of the risks.
  • We expect Far East Hospitality Trust’s hotel segment to be supported by its master lease income in FY21F/22F and achieve variable income in FY23F as we assume accelerated recovery of international travel from end- 2022F.
  • We expect its serviced residence segment to continue to receive variable income, supported by demand from long-term guests.
  • Far East Hospitality Trust's retail segment should deliver stronger income ahead due to minimal rental rebates and operating environment improvements.

Reiterate ADD with a higher DDM-based target price of S$0.74

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-23
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