UOB Kay Hian analyst Jonathan Koh has maintained his “buy” call and target price of 71 cents for Far East Hospitality Trust (FEHT), forecasting a recovery for the stock.
In a Nov 1 report, Koh observes that FEHT reported distributable income of $13.5 million for its 3QFY21 (up 12.5% y-o-y), which was in line with expectations.
Its hotel segment enjoys stability from fixed rents, Koh highlights, with revenue from hotels being unchanged at $14.3 million with downside protection from its fixed rents.
Occupancy for hotels dropped 18% 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.
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Six out of its nine hotels were deployed for government contracts for isolation purposes, and these contracts were extended till Feb 2022. The average daily rate (ADR) was stable at $66 in 3QFY2021. Meanwhile, Revenue Per Available Room for the hotel portfolio decreased 22.4% y-o-y to S$52 in 3QFY2021.
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For its serviced residences segment, Koh says there is “resiliency from long-stay contracts.” despite occupancy for serviced residences dropping 3% q-o-q to 72% in 3QFY2021.
This was due to a temporary decline in demand for accommodation for foreign workers earlier in the quarter, but FEHT was able to secure a longstay business from project groups as a replacement later in the quarter as the government subsequently relaxed border measures for foreign workers from South Asia since 27 Oct.
Its serviced residences ADR inched higher by 2% q-o-q to S$178, but RevPAR eased 6% q-o-q to $128.
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Furthermore, there was a rebound from commercial premises. Revenue from commercial premises increased 12.4% y-o-y in 3QFY2021 due to fewer rental rebates this year. Retail leases were restructured with a larger proportion of variable rents as percentage of gross turnover.
Separately, FEHT (which owns Central Square) and City Developments (owner of the adjacent Central Mall) have also jointly submitted a proposal to redevelop Central Square and Central Mall.
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.
This will rejuvenate the precinct and involves a potential rezoning and uplift in gross floor area (GFA), Koh thinks.
Separately, FEHT also saw a steep fall in interest expenses as such expenses declined 18% y-o-y in 3QFY2021.
Koh notes that the average cost of debts has improved by 0.4% y-o-y to 2%, and that discussion with lenders on refinancing term loans of $100 million due in Dec 2021 are ongoing and should be completed in 2H2021.
Moving forward, he is optimistic about the recovery of FEHT as Singapore opens more vaccinated travel lanes (VTL), saying they “provide a springboard and platform for the recovery of visitor arrivals in 2022.”
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The return of business travellers through VTLs is also likely, as Singapore achieved decade-high fixed asset investments of$17.2 billion in 2020, and more multi-national companies are setting up their regional headquarters in Singapore.
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These regional headquarters and major infrastructure projects are beneficial over the medium to long term for FEHT’s hotels and SRs.
Some share price catalysts include a recovery in occupancy, ADR and RevPAR in 2023, and acquisition of the remaining 70% stake of three Sentosa hotels from sponsor FEO.
As at 2.54pm, units in FEHT traded at 64 cents, with a price to book ratio of 0.8 and dividend yield of 4%
