Strong 1Q22, recovery underway, upping DPU, TP
1Q22 distributable income jumped 17.2% YoY, ahead of consensus and our
estimates, driven by lower-than-expected financing costs. While FEHT’s
hotels continue to be backed by fixed rents, NPI recovery is underway, as
RevPARs are set to strengthen with Singapore’s full reopening. Divestment
of Central Square has bolstered FEHT’s balance sheet, with potential DPU
upside from capital distributions. We raise our DPU forecasts by 8-10%, as
we pencil in higher RevPARs, with fundamentals improving into a
seasonally stronger 2H. Our DDM-based TP rises 14% to SGD0.80 (COE:
5.5%, long-term growth 2.0%). Maintain BUY.
Hotels on fixed rents, RevPAR on the rise
Hotel revenue was flat YoY and QoQ and supported by fixed rental from its
master leases, while contributing c.68% of total 1Q22 revenue. Occupancy
declined to 67.7% (from 76.1% in 1Q21), with the expiration of government
contracts at 2 of its 9 hotels, with 3 remaining and rolled over into 2Q22.
RevPAR rose c.16% YoY to SGD59 while ADRs jumped c.32% YoY to SGD87,
from a favourable trade mix (with higher corporate and leisure demand).
We expect RevPAR to climb with improving demand, and a reopening of
the Elizabeth Hotel in 3Q22 post-AEI.
Tightening SR vacancies, growth in long-stays
Serviced residence (SR) revenue rose c.2% YoY and 5% QoQ and continued
to perform above its fixed rent, supported by long-stay corporate demand,
which accounted for c.76% of 1Q22 revenue, led by the services (16%),
electronics and manufacturing (14%) and oil & gas industries (14%). RevPAU
jumped c.24% YoY to SGD174 on higher occupancies (74.7% to 86.6%) and
ADRs (SGD187 to SGD201). We expect vacancies to tighten further, helped
by rising relocation demand and corporate leasing activities, and we see
room for ADRs to rise further into 2H22.
Stronger balance sheet, set for AUM growth
Proceeds from the SGD313m Central Square divestment which completed
on 24 Mar 2022, helped lower borrowings and gearing to 33.4% (from 38.3%
at end-Dec 2021), while its debt headroom rose to SGD539.9m (at 45%
limit). FEHT has increased its fixed-rate debt to 67.6% (from 52.7%) with
a 25bps increase in interest rates lowering DPU by c.1%. We expect that
management will prioritise AUM growth from its sponsor’s Singapore assets
ahead of overseas diversification as it eyes acquisition opportunities.