Raise TP to SGD0.80; sharing divestment gains, BUY
FEHT’s 1H22 DPU jumped 40% YoY from 4% YoY NPI growth and divestment gains. Its hotels continue to be backed by fixed rents, but NPI recovery is underway, as RevPAR growth gains traction into the seasonally stronger 2H, with tailwinds from Singapore’s reopening. Its balance sheet is stronger, and better placed to support acquisition growth upside. We raise our DPU by 4-5% to factor in expected capital distributions from the Capital Square sale (at SGD8m pa through FY24E), and lift our DDM-based TP (COE: 5.6%, LTG: 2.0%) to SGD0.80 (from SGD0.77). Maintain BUY.
Stronger hotel RevPAR recovery in 2H22
Hotel revenue was flat YoY and QoQ in 2Q22, supported by fixed rental from its master leases, while contributing c.71% of total revenue (vs c.68% in 1Q22). Occupancy improved marginally to 68.2% in 1H22 (vs 67.7% in 1Q22) but ADR jumped c.50% YoY, resulting in c.31% YoY better RevPAR. Four of its nine hotels are on isolation contracts at higher rates until early 2023. Elizabeth Hotel’s AEI seems well-timed; its reopening in 3Q22 dovetails with rising tourist arrivals and longer average stays, and should
support a stronger RevPAR recovery in 2H22.
Positive SR fundamentals, backed by long-stays
Serviced residence (SR) revenue fell c.19% YoY/c.22% QoQ in 2Q22 with Central Square’s divestment, otherwise its 1H22 revenue rose c.12% YoY. It continued to perform above fixed rent, supported by long-stay corporate demand, at c.71% of 1H22 revenue (vs c.76% in 1Q22), led by the banking & finance (18%), services (14%), and electronics & manufacturing (12%) trades. RevPAU rose c.32% YoY to SGD182 in 1H22 on better occupancies (76.2% to 88.5%) and c.14% YoY higher ADR. We see vacancies tightening further with rising relocation demand and corporate leasing activities, with room for RevPAU to improve further into 2H22.
Stronger balance sheet, set for AUM growth
Gearing remains low at 33.3%, after divestment proceeds (in Mar 2022) helped lower borrowings, with debt headroom estimated at SGD660m (45% limit). FEHT has reduced its fixed-rate debt to 60.9% (from 67.6% in 1Q22) with a 50bps increase in interest rates lowering DPU by c.3%. We think that management could prioritise AUM growth from its sponsor’s Singapore assets ahead of overseas diversification as it eyes deal opportunities.