Far East Hospitality Trust - DBS Research 2021-03-31: Extracting Hidden Gold Within The Portfolio; En-bloc Potential Of Village Residence Clarke Quay

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Extracting Hidden Gold Within The Portfolio; En-bloc Potential Of Village Residence Clarke Quay

Potential en-bloc sale of Village Residence Clarke Quay to reap significant value.
Sale price should be above current NAV, proceeds will come in handy to recapitalise balance sheet and reward shareholders.
This should help in narrowing the P/NAV valuation discount for Far East Hospitality Trust (SGX:Q5T).

Far East Hospitality Trust (FEHT) announced that it has received an outline advice regarding the redevelopment of Central Mall at 20 Havelock Road.
Far East Hospitality Trust (SGX:Q5T) own Village Residences Clarke Quay (CQ) that forms part of the mixed-use development of Central Mall, alongside office and retail space. The mixed-use project has been earmarked for redevelopment by City Developments (SGX:C09) and sponsor Far East Organisation under the Strategic Development Incentive Scheme (SDI). The proposed plan also came shortly after the redevelopment of Liang Court in the same precinct to repurpose underutilised and ageing assets in the Robertson Quay / Clarke Quay precinct. This is in line with the SDI scheme to reward the strategic redevelopment of older buildings through an uplift in plot ratio, resulting in a rejuvenation of prime districts within and close to the Central Business District (CBD).
The proposed redevelopment for Central Mall as outlined by City Developments would comprise 70% commercial use and 30% hotel & serviced apartments.

Village Residences CQ is currently held under a 80-year lease (starting from 2012), with a latest asset valuation of S$198.3m. But as Village Residences CQ sits on freehold land, it is a prime candidate for asset rejuvenation under the scheme.
Village Residences CQ forms ~7.8% of Far East Hospitality Trust (SGX:Q5T)’s total portfolio valuation in 2020 and contributes ~8.9% to its FY20 revenue. This implies a valuation of S$1,072 psf based on the latest asset valuation, or an asset yield of 3.7%.

We believe that the most appropriate strategy that Far East Hospitality Trust (SGX:Q5T) should undertake is to divest the property to its sponsor or the joint venture companies to redevelop the asset. This strategy, in our view, will minimise the income drag and free up capital and balance sheet capacity for the REIT to pursue other acquisitions.
The “en-bloc” sale potential of Village Residences CQ offers unitholders immediate capital upside for the asset. Nonetheless, we note that the asset is one of the largest revenue contributors among Far East Hospitality Trust (SGX:Q5T)’s serviced residences, and had served the REIT well through resilient RevPAR in FY20 that retreated just 13% y-o-y in FY20 (as opposed to -50% y-o-y for the hotels segment).

We believe that appropriate divestment price will be at least the latest property value of ~S$198m (s$ psf GFA) and even potentially even higher than the highest recording valuation of the mall in FY19 at S$205.9m (s$ psf GFA). In fact, a premium of at least 5-10% on the highest valuation may well be fetched, aggregating to a divestment price in the range of S$216.2m – S$226.5m. At these prices, we believe that the valuation on the per square foot basis is still attractive at S$1,124 psf to S$1,179 psf.
Proceeds can potentially go towards acquisitions within the ROFR pipeline such as Village Sentosa or to reward unitholders through a special one-off distribution, which we estimate could range between S$0.04 and S$0.14 – implying a yield of 1%-2% that will more than compensate for the drop in earnings.
Gearing should settle at ~35%, which is more optimal compared to the current gearing of ~41%.
See

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-03-31

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