The Hill @One-North Slim Barracks Rise floor plan

UOB Kay Hian Research analyst Jonathan Koh has maintained his “buy” recommendation for Far East Hospitality Trust (FEHT) with an estimated price target (TP) of 70 cents.

In his report, dated November 28th, Koh says that FEHT is a pure game based on the rising the room rate in Singapore and the variable rent returning to levels prior to the outbreak. “FEHT will gain from the opening of Singapore’s international borders from April 2022 on a year-long basis, beginning in 2023. One of the nine hotels began contributing variable rent in the 3QFY2022 while a third hotel is set to start doing so in the 4th quarter of FY2022,” says Koh.

The Hill @One-North Slim Barracks Rise floor plan accommodates singles, couples and family-oriented residents due to its enviable location in district 5, in the Rest of the Central Region (RCR).

Variable rent makes up just less than five% of the master lease rental revenue for the FEHT’s hotels by 2022, as compared to the pre-pandemic average that was 29% in 2019 as variable rent is evaluated annually. With the rate of recovery increasing as expected by the analyst, the hotel’s revenue per available rooms (RevPAR) to rise by 51% to $135 by 2023, and then five% to $142 by 2024.

As RevPAR growth continues to grow into 2023 and 2024 Koh believes that the variable rental rate will return at 23% as well as 28% of the hotels master lease rental revenue in 2023 and 2024, respectively. Koh estimates that FEHT’s residences with service that have always contributed variable rents, despite the covid-19 pandemic and will contribute 36% of its master lease rental earnings for its residences that are serviced due to the high occupancy rate which was 90.4% in 3QFY2022.

The analyst claims that FEHT’s leverage on the whole in the range of 33.5% will enable it to endure a long period of high interest rates.

In the event of FEHT trading at a 2023 dividend yields that is 5.9% price-to-net asset value (P/NAV) of 0.73x, Koh says it is trading at a very attractive value. His TP of 71c is built on the dividend discount model (DDM) that has the 7.75% cost of equity and a growth rate terminal at 2.6%.

The other factor is FEHT’s gain of $39.3 million in the divestment of Central Square, which was completed on March 24. Koh states that FEHT plans to disperse a portion of gain from the divestment to investors at a rate of $8 million per year over three years, based on the highest net profit interest (NPI) that was achieved through Central Square since its initial public offering (IPO). In the fiscal year ending in2022, FEHT plans to dish out a capital distributions that will amount to $6.2 million.

However, Koh says Singapore’s economic revival is fuelling growth, even though hotels’ occupancy rates fell 3.1 per cent (ppt) over the course of the year (y-o-y) up to 76.1% in 3QFY2022 due to fewer hotels operating under government contracts as well as the closing of the Elizabeth Hotel to be renovated. Average daily rates (ADR) was up 107.6% y-o-y to $137 because of the return of corporate guests as well as increased prices for four of the contracts under government as well as RevPAR was up 101.9% y-o-y to $105 in the 3QFY2022.

“Currently, FEHT has four of nine hotels that are under government contracts to isolate the hotels until Dec 2022 or January 2023. These contracts from the government provide similar income to market, but have less operating costs. FEHT will consider redeploying the four hotels to cater for business and leisure travellers in the early 2023 timeframe if the increase in arrivals of visitors continues to increase,” says Koh.

Serviced residences also have shown the ability to withstand long-stay contracts that have both variable and fixed rents. On a store-by-store basis without Village Residence Clarke Quay, occupancy increased 12.1ppt per year up to 90.4% and ADR increased 24.4% y-o-y to $235 in 3QFY2022 owing to the high demand from corporate guests who stay for long periods according to Koh adding that RevPAR was up 43.7% y-o-y to $213 in the 3QFY2022.

He has reduced the distribution for 2023 (DPU) projection by 8% because of the increased costs of debt under assumptions that $132 million of loan, or 18% of the total borrowings at FEHT will be refinancing with 4.5% sometime in mid-2023.

The catalysts for Koh’s shares comprise upside protection from fixed rents incorporated into the master leases it has with its sponsor Far East Organization (FEO) which holds the majority of 61% of FEHT The company’s continued growth on occupancy levels, ADR as well as RevPAR between 2023-2024 aswell being the purchase of the remaining 70% stake in the three Sentosa hotel properties from FEO.

At 3.41 at 3.41, units of FEHT were trading at 1 cent, or 1.61% down at 61 cents.

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