Variable rents to potentially materialise this year; Capital gain top ups pose upside to current estimates
- Far East Hospitality Trust (FEHT) reported a gross revenue of S$41m for 1H22 (-1.4% y-o-y).
- NPI rose 3.5% y-o-y to S$37.5m despite disposal of Central Square.
- Distributable income rose 14.4% y-o-y to S$29m, making up 50% of our full year DI forecast of S$58.1m. 2H22 could post stronger performance vis-à-vis 1H22 as restrictions eases and travel continues to ramp up.
- DPU surged 40% y-o-y to 1.54 Scts, exceeding our half yearly estimates of 1.47 Scts (full year forecast at 2.93 Scts).
- FEHT will be sharing divestment gains from Central Square divestment – of approximately S$8m per year for three years (FY22-25).
- Capital gains top up this year has been quantified to be S$6.2m this year, or approximately nine months pro-rated for this year to cover nine months income lost from central square, c.0.31 Scts per share.
- This translates to an additional c.0.40 Scts per share per annum in capital gains distribution, which poses as an upside to our current estimates.
Stable financial metrices
- Gearing remains stable at 33.3%, with 61% of debt currently hedged on fixed rates.
- There will be no more refinancing due for this year and c.18% of borrowings up for renewal in FY23.
- Current average cost of debt at 1.8% with expectations to increase c.40bps towards year end.
Potential for variable hotel rents in 2H22
- 1H22 Hotel RevPAR led by higher ADR. RevPAR improvements this half was primarily led by higher daily rates, which surged 50% y-o-y to S$99 in 1H22. More optimism in 2H22 with Elizabeth Hotel to be added back to FEHT room inventory post-reopening and the return of corporate travellers to benefit hotels within the central business district catchment such as Oasia Downtown.
- Progress of incentive fee associated with Central Square divestment. There remains c.S$18m in incentive fees in relation to Central Square divestment pertinent on authorities approval under the redevelopment scheme. We await further news on this and for the incentive fee to crystalise, which will come in year-end or 1Q23 at the earliest. This could potentially be paid out to unitholders or used as acquisition proceeds.
- Increased length of stay. Like sharing by other hotel operators, similarly FEHT has also seen an increase in length of stay across the portfolio. Prior to COVID, FEHT’s length of hotel stay averaged at about three days, and one month for serviced residences. This has generally seen a doubling in 1H22.
- Hotels RevPAR has re-rated to about S$75, or crossing the 50% level compared to pre-pandemic performance, this is not withstanding the lack of contributions from Elizabeth hotel.
- While not currently priced in our estimates, there remains a possibility that FEHT will be in a place to receive variable master lease rents from the hotels segment should annualised RevPAR cross the c.S$120 threshold.
Maintain BUY; capital gains top ups an upside to estimates.