1H22: On Track To Ride The Recovery
The reopening of borders in April has accelerated the pace of recovery. RevPAR for hotels increased 29% qoq to S$76 as ADR recovered 28% qoq in 2Q22. Occupancy for serviced residences improved 8.2ppt yoy to 90.1% in 1H22. Management plans to distribute a portion of divestment gain from Central Square at S$8m per year over three years. Distribution yield will improve to 6.4% in 2023. FEHT trades at a steep 25% discount to NAV per unit of S$0.85. Maintain BUY. Target price: S$0.83
RESULTS
• Far East Hospitality Trust (FEHT) reported DPU of 1.54 S cents for 1H22 (up 40% yoy), which are in line with our expectations.
• Hotels: Reopening triggered recovery. Revenue from hotels was unchanged with fixed rents of S$14.3m. Occupancy for hotels dropped 9.4ppt yoy to 68.2% in 1H22 due to the closure of Elizabeth Hotel for renovation. Average daily rate (ADR) increased 50% yoy to S$99 in 1H22 due to the return of business and leisure guests and higher rates for government contracts. We estimate that ADR has increased 28% qoq to S$111 in 2Q22. Currently, FEHT has three out of its nine hotels on government contracts, which are extended till end-22. RevPAR recovered 31.4% yoy to S$67 in 1H22. Similarly, we estimate that RevPAR has increased 29% qoq to S$76 in 2Q22.
• Serviced residences: Resiliency from long-stay contracts. Serviced residences contributed both fixed rents and variable rents. On a same-store basis, excluding Village Residence Clark Quay, occupancy improved 8.2ppt yoy to 90.1% and ADR increased 6.7% yoy to S$208 in 1H22 due to an increase in long-stay corporate and project groups. RevPAR expanded 16.9% yoy to S$187 in 1H22.
• Capital distribution from divestment gain. FEHT recorded gains of S$39.3m on the divestment of Central Square in 1H22, which was completed on 24 Mar 22. Management intends to distribute a portion of the divestment gains at S$8m per year over three years based on the highest historical NPI achieved by Central Square since its IPO. FEHT has dished out capital distribution of S$2m in 1H22 and estimates capital distribution at S$4m in 2H22.
• Steep fall in interest expense. Interest expenses declined 23.9% yoy in 1H22. The average cost of debts inched marginally higher by 0.1ppt qoq to 1.8% in 2Q22. Management estimated that the cost of debt could increase by about 40bp in 2H22. Every 25bp increase in interest rates is expected to reduce FEHT’s distributable income by 1%. Aggregate leverage remains low at 33.3% after FEHT repaid a term loan of S$238.6m using the proceeds from the divestment of Central Square. 60.9% of its borrowings are hedged to fixed interest rates.
STOCK IMPACT
• Benefitting from resurgence of inbound visitors. The Vaccinated Travel Framework has replaced the existing Vaccinated Travel Lane scheme since 1 Apr 22. Subsequently, Singapore’s international borders were fully reopened starting 26 Apr 22. Business travellers are returning in droves, followed by leisure travel by individuals and tour groups. Visitor arrivals have surged to reach 543,732 or 35% of pre-pandemic levels in Jun 22. Average length of stay was 5.7 days, compared with the pre-pandemic level of 3.6 days. Singapore will benefit from the F1 Singapore Grand Prix in September and more than 66 international events in 2H22.
• Recovery on upward trajectory in 2H22. The Quincy Hotel and Oassia Hotel Downtown are performing well with RevPAR above pre-pandemic levels. The former has won the Best Hotel Experience Award at the Singapore Tourism Awards due to its pleasant ambience. The latter is strategically located in the howntown Tanjong Pagar area. We expect occupancy and ADR to improve as the recovery strengthens in 2H22. For five hotels deployed to serve business and leisure travellers, occupancy is expected to improve to 60- 70% in 3Q22 and 70-80% in 4Q22, compared to 40-50% in 2Q22. One more hotel was contracted to the government at significantly higher rates starting Aug 22, making a total of four hotels under government contracts for isolation purposes.
• Preparing to welcome travellers with new brands and new services. The Elizabeth Hotel has completed the upgrading of its reception, common areas and guestrooms. The hotel will reopen in phases with a soft launch in August, and will be fully reopened by end22. It has 256 rooms. FEHT will be launching a new brand with a new approach in service offering. The lobby and reception areas of Regency House are undergoing refurbishment, with expected completion in 3Q22. It will be rebranded as Adina Serviced Apartments Singapore Orchard.
EARNINGS REVISION/RISK
• We raised our 2022 DPU forecast by 5.8% due to the rapid recovery in visitor arrivals and capital distribution from divestment gains.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$0.83 is based on DDM (cost of equity: 7.5%, terminal growth: 2.6%).
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.
