A “pure play” on room rate recovery is Far East Hospitality Trust

UOB Kay Hian Research analyst Jonathan Koh has maintained his “buy” recommendation for Far East Hospitality Trust (FEHT) with the price target (TP) of 70 cents.

In his report, dated November 28th, Koh says that FEHT is a direct play on the rise in the room rate in Singapore and variable rent returning to levels pre-pandemic. “FEHT will gain from the opening of Singapore’s borders internationally from April 2022, on a whole-year basis, beginning in 2023. One of the nine hotels began to contribute variable rent in the 3QFY2022 while a third hotel is scheduled to join in the 4th quarter of FY2022,” says Koh.

TMW Maxwell Condo Maxwell Road is within the vicinity are plenty of dining, shopping and entertainment amenities allowing the future residents of TMW Maxwell to meet their day-to-day needs within walking distance.

Variable rent makes up just less than five% of the master rent rental income of the hotels of FEHT in 2022. This is in contrast to the pre-pandemic level that was 29% in 2019, since variable rent is evaluated in a year-to-year basis. With the rate of recovery increasing and the forecast for the hotel’s revenue per space (RevPAR) to grow by 51% to $135 by 2023, and then five% to $142 by 2024.

As RevPAR recovers through 2023 and 2024 Koh anticipates that variable rent will increase up to% as well as 28% of the hotels master lease rental revenue and. Koh estimates that FEHT’s residences with service that have always contributed variable rents in spite of the Covid-19 epidemic and will contribute 36% of its master lease rental earnings for its residences that are serviced due to an occupancy rate at 90.4% in 3QFY2022.

The analyst believes that FEHT’s leverage on the whole at 33.5% will enable it to endure a long period of interest rates that are high.

The FEHT trading at a 2023 dividend yields at 5.9% price-to-net asset value (P/NAV) of 0.73x, Koh says it is trading at a reasonable value. The TP of 71 cents is basing on the dividend discount model (DDM) which has an 7.75% cost of equity and a rate of terminal growth at 2.6%.

The other factor is FEHT’s gain of $39.3 million from the sale of Central Square, which was completed on March 24. Koh says that FEHT plans to disperse a portion of profits from the divestment at a rate of $8 million per year over three years based upon the highest net profit interest (NPI) that was achieved through Central Square since its initial public offering (IPO). In Fiscal year 2022, FEHT plans to dish out a capital distributions that will amount to $6.2 million.

In the meantime, Koh says Singapore’s economic revival is fuelling improvement, but hotels’ occupancy rates decreased by 3.1 percent (ppt) per year (y-o-y) down to 76.1% in 3QFY2022 due to the fewer hotels that are under government contracts as well as the closing of the Elizabeth Hotel to be renovated. ADR, or the average day rate (ADR) was up 107.6% y-o-y to $137 because of the return of corporate guests as well as increased prices for four of the contracts with government as well as RevPAR increased by 101.9% y-o-y to $105 during the 3QFY2022.

“Currently, FEHT has four of nine hotels under government contracts to isolate the hotels until Dec 2022 or January 2023. The government contracts offer comparable income to market, but have lower operating expenses. FEHT is considering redeploying these four hotels to accommodate business and leisure travelers in the early 2023 timeframe if the increase in arrivals of visitors is continuing to grow,” says Koh.

Serviced residences have also shown the ability to withstand long-stay contracts that have both variable and fixed rents. Based on a similar-store basis, with the exception of Village Residence Clarke Quay, occupancy increased 12.1ppt per year up to 90.4% and ADR increased 24.4% y-o-y to $235 in 3QFY2022 owing to the high demand from corporate guests who stay for long periods according to Koh adding that RevPAR increased 43.7% y-o-y to $213 in the 3QFY2022.

He has reduced the distribution for 2023 (DPU) projection by 8% because of the increased costs of debt under an assumption of loans totalling $132 million, or 18% of the total borrowings at FEHT will be refinancing with 4.5% sometime in mid-2023.

The catalysts for Koh’s shares are upside protection from fixed rents that are embedded in their master leases to its sponsor Far East Organization (FEO) who owns the majority of 61% of FEHT and the ongoing improvement of occupancy ADR along with RevPAR for 2023 and 2024 aswell being the purchase of the remaining 70% stake in the three Sentosa hotel properties from FEO.

At 3.41 the units of FEHT were trading at 1 cent, or 1.61% down at 61 cents.