UOB Kay Hian Research analyst Jonathan Koh has maintained his “buy” call for Far East Hospitality Trust (FEHT) with a target price (TP) of 71 cents.
In his report dated Nov 28, Koh says that FEHT is a pure play on the recovery of room rates in Singapore, with variable rent recovering to pre-pandemic levels. “FEHT will benefit from the reopening of Singapore’s international borders since April 2022 on a full-year basis in 2023. One of its nine hotels started to contribute variable rent in 3QFY2022, with a second hotel expected to do so in 4QFY2022,” says Koh.
Variable rent accounts for less than 5% of master lease rental income for FEHT’s hotels in 2022, compared to the pre-pandemic rate of 29% in 2019, as variable rent is assessed on an annual basis. With the recovery gathering pace, the analyst expects hotel revenue per available room (RevPAR) to increase 51% to $135 in FY2023 and 5% to $142 in FY2024.
As RevPAR recovery sustains into 2023 and 2024, Koh expects variable rent to normalise to 23% and 28% of its hotels’ master lease rental income respectively. Meanwhile, he estimates that FEHT’s serviced residences, which have consistently contributed variable rents despite the Covid-19 pandemic, will account for 36% of its master lease rental income for its serviced residences due to high occupancy of 90.4% in 3QFY2022.
The analyst says that FEHT’s low aggregate leverage of 33.5% will enable it to weather an extended period of high interest rates.
With FEHT trading at an FY2023 distribution yield of 5.9% price-to-net asset value (P/NAV) of 0.73x, Koh says it is trading at an attractive valuation. His TP of 71 cents is based on a dividend discount model (DDM) with a 7.75% cost of equity and a terminal growth rate of 2.6%.
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Also contributing is FEHT’s gains of $39.3 million for the divestment of Central Square, which was completed on March 24. Koh notes that FEHT intends to distribute a portion of the divestment gains at $8 million per year over three years based on the highest historical net profits interest (NPI) achieved by Central Square since its initial public offering (IPO). For FY2022, FEHT plans to dish out capital distribution of $6.2 million.
Meanwhile, Koh says Singapore’s economic reopening is driving recovery, although the occupancy rate for hotels dropped 3.1 percentage points (ppt) year-on-year (y-o-y) to 76.1% in 3QFY2022 due to fewer hotels under government contracts and the closure of Elizabeth Hotel for renovation. The average daily rate (ADR) increased 107.6% y-o-y to $137 due to the return of corporate guests and higher rates for the remaining four government contracts, while RevPAR recovered 101.9% y-o-y to $105 in 3QFY2022.
“Currently, FEHT has four out of its nine hotels on government contracts for isolation purposes till December 2022 or January 2023. These government contracts provide comparable revenue compared to the market but incur lower operating costs. FEHT would evaluate redeploying these four hotels to serve leisure and business travellers in early-2023 if the recovery in visitor arrivals continues to strengthen,” says Koh
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Serviced residences have also displayed resilience from long-stay contracts with both fixed and variable rents. On a same-store basis, excluding Village Residence Clarke Quay, occupancy improved 12.1ppt y-o-y to 90.4% and ADR increased 24.4% y-o-y to $235 in 3QFY2022 due to strong demand from long-stay corporate guests, says Koh, adding that RevPAR expanded 43.7% y-o-y to $213 in 3QFY2022.
He has cut his FY2023 distribution per unit (DPU) forecast by 8% due to higher cost of debts under the assumption that loans of $132 million or 18% of FEHT’s total borrowings will be refinanced at 4.5% sometime in mid-2023.
Koh’s share price catalysts include downside protection from fixed rents embedded in its master leases with sponsor Far East Organization (FEO), which owns 61% of FEHT, the continuing recovery in occupancy, ADR and RevPAR in 2023 and 2024, as well as the acquisition of the remaining 70% stake of three Sentosa hotels from FEO.
As at 3.41, units in FEHT were trading 1 cent or 1.61% down at 61 cents.
