FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - 3Q21 Green Shots Of Nascent Recovery
- Far East Hospitality Trust (SGX:Q5T) reported DPU growth of 12.5% y-o-y in 3Q21. Its hotels provided downside protection with fixed rents at S$14.3m. SR suffered a temporary decline in demand for accommodation for foreign workers earlier in the quarter. Recovery is underway with more VTLs being added and the VTL quota being gradually lifted.
- Far East Hospitality Trust trades at P/NAV of 0.82x. Distribution yield will improve to 4.3% in 2022 and 6.1% in 2023.
- Maintain BUY. Target price: S$0.71.
Far East Hospitality Trust (FEHT) reported distributable income of S$13.5m for 3Q21 (up 12.5% y-o-y), in line with our expectations.
- Hotels: Stability from fixed rents. Revenue from hotels was unchanged at S$14.3m with downside protection from its fixed rents. Occupancy for hotels dropped 18ppt y-o-y but was flat q-o-q at 79%. The y-o-y drop was due to companies requiring accommodation for stranded Malaysian workers seeking alternative housing options. Six out of its nine hotels were deployed for government contracts for isolation purposes. These contracts were extended till Feb 22. Average daily rate (ADR) was stable at S$66 in 3Q21. RevPAR for the hotel portfolio decreased 22.4% y-o-y to S$52 in 3Q21.
- Serviced residences (SR): Resiliency from long-stay contracts. Occupancy for serviced residences dropped 3ppt q-o-q to 72% in 3Q21 due to a temporary decline in demand for accommodation for foreign workers earlier in the quarter. Far East Hospitality Trust was able to secure a long-stay business from project groups as replacement later in the quarter. The government subsequently relaxed border measures for foreign workers from South Asia since 27 Oct 21. ADR inched higher by 2% q-o-q to S$178. RevPAR eased 6% q-o-q to S$128. Its SRs contributed to both fixed rents and variable rents.
- Rebound from commercial premises. Revenue from commercial premises increased 12.4% y-o-y in 3Q21 due to less rental rebates this year. Retail leases were restructured with a larger proportion of variable rents as percentage of gross turnover.
- Steep fall in interest expense. Interest expenses declined 18% y-o-y in 3Q21. The average cost of debts has improved by 0.4ppt y-o-y to 2.0%. Discussion with lenders on refinancing term loans of S$100m due in Dec 21 are ongoing and should be completed in 2H21. Aggregate leverage was stable at 41.6%.
Green shots of nascent recovery.
- Singapore has extended quarantine-free vaccinated travel lanes (VTL) to Australia and Switzerland starting 8 Nov 21. The current VTL quota of 3,000 travellers daily will also be increased to 4,000. Singapore currently has 11 VTLs. The addition of Australia and Switzerland brings the total to 13. VTLs are particularly useful for business travellers. High vaccination rates in many advanced economies augur well for more VTLs to be introduced. While the initial volume starting 4Q21 is expected to be small, VTLs provide a springboard and platform for the recovery of visitor arrivals in 2022.
- Return of business travellers through VTLs. Singapore achieved decade-high fixed asset investments of S$17.2b in 2020. More multi-national companies are setting up their regional headquarters in Singapore. Major infrastructure projects in Singapore include Tuas Mega Port, Changi Airport Terminal 5, North South Corridor and Cross Island MRT Line. These regional headquarters and infrastructure projects are beneficial over the medium to long term for Far East Hospitality Trust’s hotels and SRs.
- Downside protection from high fixed rent component. Far East Hospitality Trust is the most defensive hospitality REIT. All Far East Hospitality Trust hotels and SRs are under master lease agreements with subsidiaries within sponsor Far East Organisation (FEO). The fixed rent component from its master leases totalled S$67m per year, which is equivalent to 72% of total gross revenue from its hotels and SRs in 2019 (pre-COVID-19). These fixed rents formed about 81% of gross revenue 1H21. These 20-year master leases run till 2032.
- Redeveloping Central Square. Far East Hospitality Trust (which owns Central Square) and City Developments (SGX:C09) (owner of the adjacent Central Mall) have jointly submitted a proposal to redevelop Central Square and Central Mall under the strategic development incentive scheme. The JV has received an outline advice from the Urban Redevelopment Authority (URA) for the redevelopment, which comprises SRs (30%) and commercial spaces (70%), including office and retail units. The JV is working on obtaining outline permission and subsequently planning permission for the proposed integrated development, which will rejuvenate the precinct and involves a potential rezoning and uplift in gross floor area (GFA).
- Well-deserved recognition with inclusion in key real estate index. Far East Hospitality Trust was included in the FTSE EPRA Nareit Developed Asia Index with effect from 20 Sep 21. Trading liquidity has improved tremendously. Average daily turnover has doubled to current US$1.4m since inclusion in the index.
- Leading the S-REITs industry in transparency and governance. In Aug 21, Far East Hospitality Trust was ranked second out of 43 REITs and business trusts on the Singapore Governance and Transparency Index. In Oct 20, Far East Hospitality Trust was ranked seventh out of 45 REITs and business trusts on the Singapore Governance Index.
Far East Hospitality Trust - Earnings revision
- We kept our DPU forecast relatively unchanged.
- Maintain BUY. Our target price of S$0.71 is based on DDM (cost of equity: 7.0%, terminal growth: 1.8%).
- See
- Catalysts:
- Downside protection from fixed rents embedded in master leases with sponsor FEO, which owns 61% of Far East Hospitality Trust.
- Recovery in occupancy, ADR and RevPAR in 2023.
- Acquiring the remaining 70% stake of three Sentosa hotels from sponsor FEO.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-11-01
SGX Stock
Analyst Report
0.710
SAME
0.710
