1Q22: Preparing To Welcome The Return Of Business And Leisure Travellers
Outlook has improved with the rapid reopening of international borders in Apr 22. Three
hotels under government contracts were redeployed to serve business and leisure
travellers in 1Q22 while serviced residences benefitted from the sustained increase in
long-stay corporate and project groups. We forecast that FEHT’s distribution yield will
improve to 5.7% in 2023. FEHT trades at P/NAV of 0.80x. Maintain BUY. Target price:
S$0.82.
RESULTS
• Far East Hospitality Trust (FEHT) reported distributable income of S$14.7m for 1Q22 (up
17.2% yoy), which was in line with our expectations.
• Hotels: Stability from fixed rents. Revenue from hotels was unchanged at S$14.3m with
downside protection from its fixed rents. Occupancy for hotels dropped 8.4ppt yoy to 67.7%
in 1Q22 (74% if we exclude Elizabeth Hotel) due to the cessation of government contracts
for isolation purposes for three hotels (Village Hotel Albert Court, Quincy Hotel and Elizabeth
Hotel). Rooms from these three hotels were put back to the market in Dec 21. Currently,
FEHT has only three out of its nine hotels on government contracts. The remaining three
government contracts were extended by 2-3 months till mid-22. Average daily rate (ADR)
increased 31.8% yoy to S$87 due to the switch towards business and leisure travellers.
RevPAR for the hotels increased 15.7% yoy to S$59.
• Serviced residences: Resiliency from long-stay contracts. Serviced residences
contributed both fixed rents and variable rents. Occupancy improved 11.9ppt yoy to 86.6%
and ADR increased 7.5% yoy to S$201 in 1Q22 due to an increase in long-stay corporate
and project groups. RevPAR expanded 24.3% yoy to S$174.
• Steep fall in interest expenses. Interest expenses declined 23% yoy in 1Q22. The average
cost of debts improved by 0.2ppt qoq to 1.7%. Management estimated that every 25bp
increase in interest rates reduces FEHT’s DPU by 1%.
• The proportion of borrowings hedged to fixed interest rates have expanded from 53% to
68% after repaying a term loan of S$238.6m using proceeds from the divestment of Central
Square in Mar 22. Aggregate leverage has dropped 4.9ppt qoq to 33.4%.
STOCK IMPACT
• Air travel getting back to normal again. Vaccinated Travel Framework has replaced the
existing Vaccinated Travel Lane scheme since 1 Apr 22. Fully-vaccinated travellers and
children aged 12 and below who have taken the COVID-19 test two days before departure
were allowed to enter Singapore. They no longer have to take an antigen rapid test (ART)
within 24 hours of arrival. Travellers are no longer restricted to take only designated flights to
enter Singapore quarantine-free. The quota on the number of daily arrivals was abolished.
Subsequently, the requirement for pre-departure COVID-19 tests was also abolished starting
26 Apr 22.
• Benefitting from pent-up demand to travel. Singapore’s border has fully reopened to
vaccinated travellers with the rapid easing of travel restrictions in Apr 22. Business travellers
are returning in droves, followed by leisure travel by individuals and tour groups. 2Q22 is a
transition quarter as an increase in business and leisure travellers offset the drop off in
corporate contracts for accommodation of foreign workers. The recovery is expected to be
more pronounced in 2H22. International Air Transport Association (IATA) expects air
passenger traffic in the Asia Pacific region to reach 68% of pre-pandemic levels in 2022,
84% in 2023 and 97% in 2024.
• Preparing to welcome travellers with new brands and new services. The Elizabeth
Hotel is undergoing upgrading of reception, common areas and guestrooms and will reopen
in phases in 3Q22. FEHT will be launching a new brand with a new approach in service
offering. Regency House is undergoing refurbishment of the lobby and reception areas with
expected completion in 3Q22.
• Deleveraged and well positioned for future expansion. FEHT has entered into a put-and-call option agreement and has completed the divestment of Central Square for S$313.2m on
24 Mar 22. Exit yield is attractive at 1.8%. The estimated divestment gain is S$112.4m130.4m. There is an additional incentive fee of S$18m if certain conditions are fulfilled by
Dec 23. Assuming 84% of the divestment proceeds is utilised to repay outstanding
borrowings, aggregate leverage is expected fall from 41.3 to 33.4%. Debt headroom
increased to S$539.9m based on aggregate leverage limit of 45%. FEHT will consider
distributing a portion of the divestment proceeds of S$50.4m (2.6 S cents per unit) to
unitholders.
• Downside protection from high fixed rent component. FEHT is the most defensive
hospitality REIT. All FEHT hotels and serviced residences are under master lease
agreements with subsidiaries within sponsor Far East Organisation (FEO). The fixed rent
component from its master leases totalled S$67m per year, which is equivalent to 72% of
total gross revenue from its hotels and serviced residences in 2019 (pre-COVID-19). These
fixed rents formed 98% of total gross revenue in 2021. These 20-year master leases run till
2032.
EARNINGS REVISION/RISK
• We raised our 2022 DPU forecast by 4% due to the rapid reopening of borders in Apr 22 and
an earlier-than-anticipated recovery in 2H22.
VALUATION/RECOMMENDATION
• Maintain BUY. We raised our target price to S$0.82 based on DDM (cost of equity: 6.5%
(previous: 6.75%), terminal growth: 1.8%).
SHARE PRICE CATALYST
• Downside protection from fixed rents embedded in master leases with sponsor FEO, which
owns 61% of FEHT.
• Recovery in occupancy, ADR and RevPAR in 2H22 and 2023.
• Acquiring the remaining 70% stake of three Sentosa hotels from sponsor FEO.