Excerpts from CGSCIMB report

Far East Hospitality Trust (SGX: Q5T)

• 3Q/9M22 NPI grew 7.8%/4.9% yoy, in line at 26.5%/76.8% of FY22F.
• Some hotels trading above minimum rent in 3Q; one generating variable rent.

We like FEHT’s SG hospitality portfolio and robust balance sheet. Stay Add.

Central Square divestment masking SR/commercial revenue growth

3Q/9M22 NPI of S$19.7m/S$57.2m (+7.8%/+4.9%) was in line, forming 26.5%/76.8% of FY22F. Strong recovery in operations. 3Q22 revenue grew 2.0% yoy despite the divestment of Central Square on 24 Mar 2022. On a same-store basis, 3Q/9M22 revenue for hotels grew 4.7%/1.6% yoy as most hotels continue to be on minimum rent, while SR revenue grew 44.9%/22.2% yoy and revenue from commercial premises grew 19.1%/14.8% yoy. Gearing stayed low at 33.6%, cost of debt up qoq from 1.8% to 2.5%.

9M22 hotel/SR RevPAR increased 53.8%/25.7% yoy

3Q/9M22 hotel RevPAR increased 107.8%/53.8% yoy to S$137/S$80, but was still at 84% and 64% of pre-Covid levels as Vibe Hotel Singapore Orchard (formerly The Elizabeth Hotel), which represents 9.2% of hotel room inventory, was closed for renovation from Feb-Aug 2022. Service Residences (SR) continue to perform above preCovid levels, with RevPAR increasing 43.7%/25.7% yoy in 3Q/9M22, helped by strong residential rents which lifted the long-stay SRs. Rebranding initiative at Vibe Hotel has paid off, with average daily rate (ADR) increasing 33% from S$150 to S$200. While FEHT’s hotels are not located along the Formula One (F1) circuit, its city hotels benefited from the uptick in F1 and MICE travellers during the weeks surrounding the F1 event. We understand that FEHT’s room rates were up to S$100 higher during that period.

Several hotels operating above minimum rent in 3Q22

Four out of nine of FEHT’s hotels are on government contacts which will run until Dec 22/Jan 23. These hotels were re-contracted in Aug 22 at higher rates. While the contracted rates are below pre-Covid, these hotels were operating above minimum rent as gross operating profit was boosted by lower operating cost due to the low utilisation rate. While a few of its hotels, including the four government-booked hotels, were operating above minimum rent in 3Q22, only one hotel started generating variable income as variable rent is calculated on a yearly basis, and hotels would need to make up for the weaker operation pre-reopening in 1H22. We understand that the ramp-up rate for hotels exiting government bookings has improved significantly compared to end2021/early-2022. FEHT’s JV assets, The Outpost and Village Sentosa, were taken off government contracts in Aug 22 and achieved 60% occupancy rate within one month.

Valuation/Recommendation

FY23F DPU yield of 7.8% attractive at +2.5 s.d. of historical average. We keep our FY22-24F DPU estimates unchanged. We roll forward our estimates to FY25F. DDM-based TP falls from S$0.80 to S$0.73 as we factor in higher risk-free rate (from 2.5% to 3.0%), which pushed COE from 7.6% to 8.1%. Re-rating catalysts include acquisition of the remaining 70% stake in the Sentosa properties. Key downside risks include lower-than-forecasted travel recovery/demand. FEHT is our top pick in the sector.

You can find the full report here and the company website here