Far East Hospitality Trust: Going from strength to strength
- Gross revenue rose 28% y-o-y to S$106.8m; FY23 DPS of 4.06 Scts (+25% y-o-y) ahead of our estimates
- Full-year variable income saw a six-fold increase y-o-y to exceed pre-COVID levels, on a 36% y-o-y increase in hotel revenue; more upside from AEI and rebranding
- Portfolio valuation up 2.6% y-o-y, mirroring peers’ performance within the SG market; capital management stable with interest rate hedge low at 42.6%
- Maintain BUY with higher TP of S$0.80
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- Gross revenue in 2H23 rose 28.6% y-o-y to S$54.8m
- Full-year gross revenue and NPI rose 27.8% y-o-y to S$106.8m and 27.7% y-o-y to S$98.7m, respectively
- A strong rebound was seen in revenue of the hotel segment, which rose 36% y-o-y, and, to a smaller extent, the serviced residences (SR, 7.9% y-o-y) and commercial segments (9.2% y-o-y)
- Variable income from both the hotel and SR segments rose c.6x y-o-y to S$17.1m and were above FY19 levels
- As such, full-year DPS rose 25.1% y-o-y to 4.09 Scts, including S$8.2m in divestment gain proceeds from Central Square
- Hotel segment saw a recovery in both corporate and leisure bookings; RevPAR rose 48% y-o-y to S$136
- Hotel segment occupancy rose 6.3ppt y-o-y to 80.1%, while ADR rose 36.1% y-o-y to S$170
- SR segment RevPAR rose 14.7% y-o-y to S$229 (same-store basis excluding Central Square divestment), a new high since the IPO
- SR occupancy was flat at 88%, with most of the upside from higher room rate pricing, which rose 15.3% y-o-y to S$260
- Capital management: Aggregate leverage remains healthy at 31.3%, with average cost of debt of 3.3%; interest coverage ratio was 3.5x
- Proportion of fixed IR hedge has reduced to 42.6% as at 31 Dec 2023 (from 54% as at 4Q22) and stands as one of the lowest within the sector
Our thoughts
Asset valuation mirrors that of peers with a 2.6% y-o-y gain. FEHT reported a valuation gain on investment properties of c.S$59.2m for the year, supported by a 2.7% y-o-y increase in hotel valuations and 1.7% y-o-y increase in SR valuations. Valuation gains are well supported by underlying cash flow, with a further upside concentrated within the hotel segment, in our view. FEHT’s hotels that are positioned within the upscale segment saw an operational ceiling last year, affected by both government quarantine contracts in the early part of last year and AEI or rebranding within the portfolio, where hotel room inventory was shelved, for instance, with Vibe Hotel’s rebranding in late 2022 and soft refurbishment work at Oasia Downtown hotel. Going into 2024, we estimate that all room inventory should be released into the market, potentially commanding higher rates on AEI completions.
Hotels’ RevPAR of S$136 continues to buoy upside potential. FEHT first saw RevPAR exceed 2019 levels in 3Q23, a recovery that was slower than that of its peers that are positioned in the luxury end of the segment. We see FEHT’s offerings within the upscale hotel tier falling into the sweet spot for budget-conscious and corporate travellers, who will be catalysed by flight recovery and the moderation in ticket prices. Hotels within the upscale and mid-tier segments have generally lagged in terms of recovery, coming in at c.117% above pre-COVID base rates (3Q23 figures), compared to luxury and economically positioned hotels. In our view, the sweet spot of daily rates falls within the pocket-friendly range of S$200-300+ per night, which will continue to appeal to mass market travellers, where FEHT has the largest exposure.
Maintain BUY with higher TP of S$0.80.We roll forward our estimates into FY24. We are maintaining our interest cost of 3.75% for the full year of 2024 and pricing in stronger occupancy estimates of 84% for FEHT’s hotel segment in FY24 (pre-COVID occupancy at c.88%). Management shared that the additional incentive fee of c.S$18m from the Central Square divestment could be used to shield from higher interest cost in the coming years as a result of capital top-ups, which we have not factored into our estimates. This would be in addition to the guided three-year divestment gain top-up of S$24m over three years, which we have priced in.
FY Dec | 2H2022 | 1H2023 | 2H2023 | % chg yoy | % chg hoh |
Gross revenue | 42.6 | 52.0 | 54.8 | 28.6 | 5.2 |
Property expenses | (2.7) | (3.1) | (5.0) | 84.6 | 62.8 |
Net Property Income | 39.9 | 49.0 | 49.8 | 24.8 | 1.6 |
Other Operating expenses | (5.6) | (5.7) | (6.0) | 8.2 | 4.6 |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | 0.0 | - | - |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | - | - |
Net Interest (Exp)/Inc | (9.0) | (10.2) | (11.1) | (22.5) | (8.5) |
Exceptional Gain/(Loss) | 1.97 | (7.1) | (5.2) | - | 26.7 |
Net Income | 27.2 | 25.9 | 27.5 | 0.9 | 6.0 |
Tax | (0.1) | (0.1) | (0.1) | 32.7 | 4.4 |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 27.1 | 25.8 | 27.3 | 0.8 | 6.0 |
Total Return | 129 | 43.7 | 86.6 | (33.0) | 98.1 |
Non-tax deductible Items | (99.2) | (6.4) | (46.7) | (52.9) | 625.4 |
Net Inc available for Dist. | 30.2 | 37.4 | 39.9 | 32.0 | 6.5 |
Ratio (%) |
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Net Prop Inc Margin | 93.6 | 94.1 | 90.9 |
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Dist. Payout Ratio | 114.0 | 102.6 | 100.4 |
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