Far East Hospitality Trust - UOB Kay Hian 2022-11-28: Variable Rent Kicks In As Room Rate Rises

• Far East Hospitality Trust is a pure play on the recovery of room rates in Singapore. RevPAR for hotels increased 37% q-o-q to S$104 in 3Q22. As RevPAR recovery sustains into 2023 and 2024, we expect variable rents to normalise to a respective 23% and 28% of its hotels’ master lease rental income.
• Its low aggregate leverage of 33.5% enables Far East Hospitality Trust to weather an extended period of high interest rates.
• Valuation is attractive with Far East Hospitality Trust's share price trading at 2023 distribution yield of 5.9% P/NAV of 0.73x.

Variable rent recovering to pre-pandemic levels.

• Far East Hospitality Trust (SGX:Q5T) will benefit from the reopening of Singapore’s international borders since Apr 22 on a full-year basis in 2023. One of its nine hotels started to contribute variable rent in 3Q22, with a second hotel expected to do so in 4Q22. Variable rent accounts for less than 5% of master lease rental income for its hotels in 2022 (pre-pandemic in 2019: 29%) as variable rent is assessed on an annual basis.
• With the recovery gathering pace, we expect hotel RevPAR to increase 51% to S$135 in 2023 and 5% to S$142 in 2024. Variable rent is estimated to account for 23% and 28% of its hotels’ master lease rental income in 2023 and 2024 respectively.

Hotels: Reopening drives recovery.

• Occupancy for Far East Hospitality Trust's hotels dropped 3.1ppt y-o-y to 76.1% in 3Q22 due to fewer hotels under government contracts and the closure of Elizabeth Hotel for renovation. Average daily rate (ADR) increased 107.6% y-o-y to S$137 due to the return of corporate guests and higher rates for the remaining four government contracts. RevPAR recovered 101.9% y-o-y to S$105 in 3Q22.
• Currently, Far East Hospitality Trust has four out of its nine hotels on government contracts for isolation purposes till Dec 22/Jan 23. These government contracts provide comparable revenue compared to the market but incur lower operating costs. Far East Hospitality Trust would evaluate redeploying these four hotels to serve leisure and business travellers in early-23 if the recovery in visitor arrivals continues to strengthen.
• Elizabeth Hotel rebranded as Vibe Hotel Orchard. The Elizabeth Hotel has completed the upgrading of its reception, common areas and guestrooms. The hotel held a soft launch with 100 rooms in September. It was officially reopened with 256 rooms and rebranded as Vibe Hotel Orchard in November. Room rates have increased substantially. Our cursory checks on online booking platforms indicate that room rates are easily north of S$300 per night for 2023, twice that of pre-pandemic levels.

Serviced residences: Resiliency from long-stay contracts.

• Serviced residences contributed both fixed rents and variable rents. On a same-store basis, excluding Village Residence Clark Quay, occupancy improved 12.1ppt y-o-y to 90.4% and ADR increased 24.4% y-o-y to S$235 in 3Q22 due to strong demand from long-stay corporate guests. RevPAR expanded 43.7% y-o-y to S$213 in 3Q22.
• Far East Hospitality Trust’s serviced residences have consistently contributed variable rents despite the COVID-19 pandemic. We estimate that variable rent accounted for 36% of its master lease rental income for its serviced residences due to high occupancy of 90.4% in 3Q22.

Capital distribution from divestment gain.

• Far East Hospitality Trust recorded gains of S$39.3m for the divestment of Central Square, which was completed on 24 Mar 22.
• Management intends to distribute a portion of the divestment gains at S$8m per year over three years based on the highest historical NPI achieved by Central Square since its IPO.
• For 2022, Far East Hospitality Trust plans to dish out capital distribution of S$6.2m (1H22: S$2m and 2H22: S$4.2m).

9th consecutive month of recovery in visitor arrivals.

• Visitor arrivals increased 34-fold y-o-y and 4.4% m-o-m to 816,758 in Oct 22, reaching 53% of pre-pandemic levels. Indonesia continues to be the largest source, accounting for 133,408 or 16.3% of all arrivals. Other ant source markets include India, Malaysia and Australia.
• Continued pick-up in visitor arrivals and events. Hotels are benefitting from the return of corporate travellers. Notable recent MICE events that attracted many foreign delegates were Bloomberg New Economy Forum and Singapore Fintech Festival. The record-high attendance for the Singapore Grand Prix in Sep 22 provides confidence for event organisers to plan more events and to scale up their events.
• Room rates are rising due to the influx of corporate travellers and robust pent-up demand. Changi Airport’s Terminals 2 and 4 have resumed operations in September and October respectively, in order to support the anticipated growth in air traffic.

Far East Hospitality Trust – Earnings forecast revision & recommendation

• We cut our 2023 DPU forecast for Far East Hospitality Trust by 8% due to higher cost of debts. We have assumed that loans of S$132m (18% of total borrowings) will be refinanced at 4.5% sometime in mid-23.
• Maintain BUY recommendation on Far East Hospitality Trust. Our target price of S$0.71 is based on DDM (cost of equity: 7.75%, terminal growth: 2.6%).
• Catalyst:
  • Downside protection from fixed rents embedded in its master leases with sponsor Far East Organisaiton, which owns 61% of Far East Hospitality Trust.
  • Recovery in occupancy, ADR and RevPAR in 2023 and 2024.
  • Acquiring the remaining 70% stake of three Sentosa hotels from sponsor Far East Organisaiton.