Far East Hospitality Trust - OCBC Investment 2022-10-31: A Good Quarter

• Far East Hospitality Trust (SGX:Q5T)'s hotels RevPAR doubled y-o-y in 3Q22.
• Serviced residences RevPAU surpassed pre-COVID levels.
• 3 hotels remained on government isolation business.

Far East Hospitality Trust's 3Q22 business update

• Far East Hospitality Trust's 3Q22 gross revenue rose 2.0% y-o-y to S$21.2m, driven by higher contribution from the hotel segment (+4.7% y-o-y). The growth was partially offset by lower revenue in the Serviced Residences (-3.1% y-o-y) and commercial premises (-4.3% y-o-y) due to the divestment of Central Square which was completed on 24 Mar 2022.
• Excluding the impact of divestment, revenue for the serviced residences and commercial premises would have grown 44.9% and 19.1% y-o-y respectively in 3Q22.
• Meanwhile, net property income grew 7.8% y-o-y to S$19.7m during the quarter.

Hotels’ RevPAR recovered to ~70% of pre-COVID levels in 3Q22

• Occupancy rate for hotels declined 3.1 percentage points (ppt) y-o-y to 76.1% in 3Q22, due to the cessation of government contracts for some hotels and the closure of the Elizabeth Hotel for renovation, which has since reopened as the Vibe Hotel Singapore Orchard in early Sep 2022. Averaged door rate (ADR) rose 107.6% y-o-y to S$137 due to higher room rates from remaining government contracts and improved room rates from corporate guests.
• Far East Hospitality Trust also managed to charge higher room rates during the F1 event period. Consequently, RevPAR doubled y-o-y to S$105, recovering to ~70% of pre-COVID levels. On a q-o-q basis, hotels’ RevPAR grew 40%.
• 4 of Far East Hospitality Trust’s nine hotels remained under government contracts with existing contracts expiring between Dec 2022 and Jan 2023.
• Overall, the hotel segment continued to collect fixed rent in 3Q22. However, we note from Far East Hospitality Trust's management that one of the hotels was able to receive variable income in 3Q22 and could see the momentum continuing in 4Q22, together with the recovery in other hotels.

Strong demand from corporate guests drove the uplift in SRs RevPAU

• Separately, 3Q22 serviced residences RevPAU rose 66.7% y-o-y to S$213, driven by higher occupancy rate (+18.6 ppt y-o-y) and ADR (+32.4% y-o-y). On a q-o-q basis, RevPAU improved 12%, on the back of strong demand from long-stay corporates guests.
• Performance of the serviced residences remained resilient with RevPAU surpassing its pre- COVID levels by 9%.

Fair value estimate of S$0.60 for Far East Hospitality Trust

• As of 30 Sep 2022, Far East Hospitality Trust's gearing remained healthy at 33.5% with only 60.9% of its debt hedged on fixed rate. We revise our growth and interest cost assumptions.
• Meanwhile, we raise our cost of equity assumption from 7.3% to 7.4% on higher beta and a higher risk-free rate assumption of 3.5% while lowering our terminal growth assumption to 1.25% given a weaker economic growth outlook in 2023.
• Collectively, our new assumptions lead us to a lower fair value estimate of S$0.60 (previously S$0.67) for Far East Hospitality Trust.

Far East Hospitality Trust – ESG Updates

• According to research, Far East Hospitality Trust’s overall governance framework is on par with that of industry peers. However, evidence suggests the Far East Hospitality Trust lags its peers in terms of social and environmental issues.
• Far East Hospitality Trust lacks comprehensive employee management and retention programs. Furthermore, it appears to lack strong programs on integrating sustainability aspects into its property management operations.
• Far East Hospitality Trust undertakes energy efficiency efforts and has acquired third-party green certification (Green Mark). However, the certification extends only to some of its properties (about 23%, as of 2019).