Far East Hospitality Trust - DBS Research 2022-10-28: Variable Hotel Rents Re-emerge!

• Far East Hospitality Trust (SGX:Q5T) reported 3Q22 gross revenue of S$21.2m (+2.0% y-o-y). This was led by higher contribution from the hotels segment which increased 4.7% y-o-y to S$14.9m to partially offset the y-o-y decline in income from Serviced Residence (SR) and commercial premises from the divestment of Central Square (completed in 1Q22).
• SR and commercial premises income would have risen 45% and 19% y-o-y on a same-store basis respectively.
• Correspondingly 3Q22 distributable income rose 12.0% y-o-y to S$15.14m, on interest savings due to ~S$260m repayment of debt in conjunction with Central Square’s divestment.
• On a year-to-date basis, gross revenue of S$62.2m was flat y-o-y.
• Far East Hospitality Trust's 9M22 distributable income of S$44.1m (+14% y-o-y) made up 76% of our full year forecast (excluding the calculation of capital gains, which will not be paid evenly across the financial year).
• S$6.2m has been factored into our full year DPU of 3.24 cents for FY22F, as part of Far East Hospitality Trust’s 3-year divestment gain strategy.

Hotel segment saw variable rent contribution in 3Q22

• Average daily rate (ADR) and revenue per available room (RevPAR) continue to see q-o-q improvements for both the hotel and SR segments of Far East Hospitality Trust.
• For the quarter, hotel ADR at S$137 (+108% y-o-y) and RevPAR of S$105 (+102% y-o-y) was an improvement from 1H22 levels of S$99 and S$67 respectively.
• Hotel occupancy in 3Q22 at 76% was flat y-o-y and was an improvement from 68% reported in 1H22. This was due to the exit of some portfolio hotels from the government booking scheme and the temporary closure of Elizabeth Hotel which was undergoing renovation and has since reopened as the rebranded Vibe Hotel in early Sep’22 with higher room rates.
• Four portfolio hotels are currently under the government booking scheme on rates comparable to market rates, with expiries between end-22 – Jan-23.
• We note that the hotels segment saw the first inflow of variable rents this quarter at S$14.9m, above the quarterly fixed rent of S$14.25m, which we suspect is led by portfolio winners situated within the central business district area.
• On a 9M22 basis for the hotels, the corporate segment continues to make up the bulk of room demand, contributing 70.6% of revenue by demand source. Top source countries of demand were guests from Southeast Asia (42%), Europe (19%) and North Asia (15%); Far East Hospitality Trust’s top 3 markets contributed 75% of total revenue.

Serviced Residences seeing strong demand from long-stay corporate sources

• For the quarter, ADR and RevPAR for the SR segment rose to S$235 (+33% y-o-y) and S$213 (+67% y-o-y) respectively on a same-store basis, outperforming 1H22’s S$206 and S$182. Average occupancy also rose 19ppts y-o-y to 90.4%.
• The SR segment continued to perform above the fixed rent level.
• Room source demand is primarily from corporates (~70% of total demand), with top industries being Services, Banking & Finance and Electronics & Manufacturing, which contributed 44% of overall revenue for the segment.

Lowest geared hotel S-REIT

• On the capital management front, Far East Hospitality Trust maintains a low aggregate leverage of 33.5%, and is the lowest geared within the hotel sector. Average cost of debt is maintained at 2.0% with an interest coverage ratio of 4.0x. Approximately 61% of debt is fixed with ~18% and 30% of debt maturing in FY23 / FY24.
• We lower our target price for Far East Hospitality Trust from S$0.78 to S$0.70. We factor in higher interest rate assumptions of 60bps/80bps to average cost of debt in FY23/FY24. Risk free rate has been revised to 3.5% to reflect the current climate.
• Correspondingly, DPU projections for Far East Hospitality Trust in FY23/FY24 have been revised down to 3.87/4.41 cents respectively (previously 4.43/4.90 cents), translating to a forward yield of 6.8%/7.8%. We have not factored any acquisitions into our estimates.