PhilipCapital analyst Liu Miao Miao has initiated a “buy” call on Far East Hospitality Trust Q5T (FEHT) with a target price of 79 cents. The analyst’s target price is based on a dividend discount model (DDM), cost of equity (COE) capital of 6.5% and terminal growth of 1.5%.
FEHT is a hospitality stapled trust with a portfolio that’s 100% based in Singapore. The REIT has an asset value of $2.5 billion as of December 2022, with a portfolio encompassing 12 properties, including nine hotels and three serviced residences which collectively make up 3,015 hotel rooms. Beyond this, it also has a total of 177 units of office and retail space in eight of its properties.
All properties operate under a master lease agreement, with rental based on a fixed component and a variable component linked to the property's operational revenue. Its sponsor is Far East Organization, which is the largest private property developer in Singapore.
In its 3QFY2023 ended Sept 30 results, FEHT’s hotel segment contributed 56.3% to its total gross revenue, while serviced residences accounted for 14.4%. Commercial premises comprised 6.5% of the total.
In her Jan 8 report, Liu likes the REIT due to three key reasons.
First, the REIT should stand to benefit from the return of leisure tourism. Singapore Airlines C6L (SIA) previously announced that it targets to reach about 90% of its pre-pandemic capacity by March 2024. In 3QFY2023, the REIT’s average daily rate (ADR) for its hotels exceeded its 3QFY2019 (or pre-Covid-19) figures by 5.5%, excluding the hotel that was under government contract.
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FEHT’s RevPAR for the quarter for serviced residences (SR) was also 22% higher than its pre-Covid-19 levels.
“As flight capacities normalise and Chinese travellers return, hotel RevPAR is expected to achieve 97% of pre-pandemic levels over the entire year,” says Liu. As Singapore is slated to have a packed MICE schedule in 2024, the analyst has projected a higher net property income (NPI) for FEHT’s SR segment, driving distribution per unit (DPU) growth in FY2024. MICE stands for meetings, incentives, conferences and exhibitions.
Next, the REIT’s master leases, which combine fixed-rent protection with variable rents, protect any potential downsides.
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“The variable component is tied to underlying revenue and profits, which is more favourable in response to rising revenue per available room (RevPAR). Fixed component alone generated 77% of total revenue and translated into a 4% dividend yield in FY2022,” notes the analyst.
This minimises potential income risk caused by uncertainty and volatility of global economic conditions.
FEHT also has a larger proportion of commercial rentals at 17.7% of total revenue compared to other hospitality REITs, and it enjoys a relatively higher level of downside protection due to the longer lease terms.
Finally, the REIT’s potential expansion overseas is another plus. The REIT is said to be exploring acquisitions in Japan with a focus on smaller assets of about $70 million to $80 million each.
The REIT completed the divestment of Central Square on March 25, 2022, which supported an upward trend in its distribution per unit (DPU). Central Square was divested for $313.2 million, representing a gain of about 70.8% over the original purchase consideration and an exit yield of 1.8%. “To counter the impact of high-interest rates, FEHT plans to cushion distributions with the $18.0 million incentive fee, targeting [an] FY2023 dividend yield of [around] 6%,” says Liu.
Following the divestment, the REIT stood as one of the least leveraged Singapore REITs (S-REITs) with a leverage ratio of 32% and a cost of debt of 3.2%. It has a debt headroom of around $900 million based on a gearing of 50%.
The potential acquisitions in Japan are expected to generate a positive carry of 2%.
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Back in business
For FY2023, Liu expects a 33% y-o-y revenue growth reaching $111.4 million, primarily driven by the normalisation of international flight capacity and numerous events scheduled during the year. The REIT typically reports its full-year results in February.
“Although the current hotel RevPAR remains at 98% of pre-Covid levels of $150 in 3QFY2023 compared to $152 in 3QFY2019, potential upside risk may primarily be reliant on a robust Chinese economy stimulating increased overseas travel,” writes the analyst.
She adds that she expects the 30-day visa-free arrangement between China and Singapore to lead to the gradual recovery of occupancy rates due to increased corporate and leisure tourism.
Currently, FEHT’s hotel occupancy rate remains at 94% of its pre-pandemic levels, which stood at 92.3%.
Liu explains: “This increase is supported by limited room supply and is anticipated to further improve in FY2024. The RevPAR for the serviced apartment segment as of 3QFY2023 had already reached 122% of the pre-Covid level, driven by the rebound in corporate travellers. Additionally, we have observed some revenue generated from citizens due to home refurbishments.”
Though serviced residences displayed positive growth, a 1.3% quarterly decline in occupancy was offset by higher room rates, resulting in a RevPAR reaching 122% of pre-Covid levels.
All hotels were out of government contracts by September FY2023, with Novena Oasia experiencing a notable increase in occupancy due to medical tourism in Singapore, while Village Changi had a slower pace.
Meanwhile, Village Hotel Albert Court re-entered a government contract until the end of FY2023 at market rates.
Risks
Despite her bullish view, Liu approaches 2H2024 with “caution” for FEHT due to potential budget constraints in both corporate and leisure sectors given the “muted” macroeconomic outlook.
She adds: “Elevated room rates and a strong Singapore dollar might divert travellers to other holiday destinations in Asean such as Thailand.”
Furthermore, FEHT, being a pure-play Singapore hospitality REIT, faces heightened exposure to geographical concentration risk in the event of an economic downturn, disease outbreak like Covid, or shifts in travel patterns.
Liu concludes: “On the back of the optimistic forecasts for Asia's hospitality sector and tightened interest rate environment, valuation for hospitality sectors remains high. Potential risks may arise from overpaying, prolonged acquisition timeline, and compressed yield spread.”
DPU estimates
For FY2023, Liu is forecasting a total DPU of 3.79 cents and 3.95 cents for FY2024. Her estimates translate into yields of 5.6% and 5.8% respectively.
Based on FEHT’s unit price of 67 cents as at her report, the REIT is trading at 0.73 times P/NAV, which is below the average S-REIT’s 0.84 times.
Her target price represents an FY2023 DPU yield of 4.8%.
As at 11.50 am, units in FEHT are trading at one cent higher or 1.55% up at 66 cents.
