CFA Society Singapore
(Mar 25): Far East Hospitality Trust (FEHT) reported a distribution per unit of four cents for FY2018, up 2.6% y-o-y. In 4QFY2018, DPU rose 3.1% y-o-y to one cent. This was the fourth consecutive quarter that DPU showed a y-o-y increase. Last year was the first time since the real estate investment trust’s IPO in 2012 that full-year DPU grew y-o-y (see chart). Last year’s DPU is still below the one recorded in 2016, but it appears likely to continue its glacial growth this year and next.
FEHT owns nine hotels and four serviced residences valued at $2.63 billion. It also holds a 30% stake in a Sentosa hotel project.
The negative demand-supply metrics that have affected FEHT’s performance since its IPO appear to be over for now. To recap: As soon as FEHT was listed, the supply of hotel rooms in Singapore ballooned. Based on statistics released by hotel, tourism and leisure consultancy firm Horwath HTL, there were 54,962 hotel rooms in Singapore as at end-2013. By end-2018, Singapore had 67,131 hotel rooms, or a compound annual growth rate of 4.1% over a five-year period. Between 2013 and 2017, CAGR was higher at 5.1%. The number of rooms is projected to rise by 1,481 this year and 823 next year.
After a four-year moratorium on the release of new hotel sites in the Government Land Sales programme, URA introduced two new sites in 2H2018. A third new hotel site at Sims Avenue was added to the 1H2019 reserve list.
“We were listed in 2012 and, during this period, there was huge supply, thousands a year, arrivals slowed, we had the issue with China, the MH370 [Malaysian Airlines] incident, and we took a few years to recover,” says Gerald Lee, CEO of FEHT’s manager. Chinese visitors, who usually visit Singapore-Kuala Lumpur and Bangkok as part of a package, dwindled following the disappearance of flight MH370 bound for Beijing from KL five years ago.
Now, arrivals are picking up just as hotel room supply is tapering. Visitor arrivals grew at a CAGR of just 1.8% between 2014 and 2016, but the pace has picked up. In 2017, arrivals grew 6.2% y-o-y and, for 2018, 6.6% y-o-y.
“If the arrivals trend stays at this level and the room supply slows, it gives us and the industry in general more confidence,” Lee says.
DPU boosted by Oasia Downtown
During FEHT’s 4QFY2018, gross revenue rose 12.4% y-o-y, net property income (NPI) rose 13.9% y-o-y and distributable income was up 4.9% y-o-y, leading to the 3.1% y-o-y gain in DPU. “The large variance is due to the acquisition of Oasia
Downtown in 2018,” Lee says. Asset enhancement initiatives (AEIs) at Orchard Rendezvous Hotel (formerly Orchard Parade Hotel) were also completed last year, resulting in better average day rates (ADR, up 4.4% y-o-y). In addition, occupancy rates in 2018 rose 1.5 percentage points to 89.1% for the hotel portfolio and the revenue per available room (RevPAR) of FEHT’s hotel portfolio grew 6.2% y-o-y to $144.
“The occupancy rate of 89% is high, and a high occupancy rate allows us to do more revenue management and get more corporate customers,” Lee says.
Orchard Rendezvous was undergoing an AEI until 1QFY2018. “We did two floors at a time, and the rebranding helped us get more corporate customers,” Lee says. Corporate customers are higher paying, compared with the wholesale segment, which comprises tour groups. In 2018, corporate customers made up 32.1% of FEHT’s hotel customers, and 73.3% of its serviced residence customers, down from 33.1% and 77.7% respectively in 2017. Leisure and independent customers made up the remaining portions. “We still need wholesale groups for the low season, for example, during Chinese New Year, when there are much fewer business travellers,” Lee says.
In terms of gross revenue, hotels contributed 69% last year, followed by serviced residences with 11.6%, and commercial (such as retail and office) with 19.4%.
According to Lee, FEHT still faces challenges in its service residence segment. This is despite improvements in occupancy rates (up 4.1ppt y-o-y to 84.1%) and revenue per available unit (up 0.9% to $177) last year.
Meanwhile, the oversupply of residential units led some developers to apply to convert their empty buildings into serviced residences, he adds. “The minimum stay [for residential units] is three months unless owners get a serviced residence licence,” Lee says, referring to the reduction in minimum rental period for private homes. In 2017, URA cut the minimum rental period to three months from six. That gives people looking for accommodation for four months and longer more choice, Lee points out.
“[The serviced residence] occupancy rate was always around 90% until the recent disruption [from Airbnb and unsold residential units], corporate cutbacks and government policy,” Lee says, referring to stricter regulations on the hiring of foreign workers.
Pipeline from sponsor
Since its IPO, FEHT has not announced a rights issue, partly because any issue would be dilutive. “For Oasia Downtown, we debt-fund everything except the management fee. We were considering issuing shares to the sponsor but, in the end, didn’t,” Lee says. This in turn boosted DPU and triggered an uptrend in FEHT’s unit price. “If we can bring the share price up, it will be less dilutive for raising equity. If we can trade above book value, that would be even better. Then, we can do a placement.”
As at Dec 31, 2018, FEHT’s gearing was 40.1%. Since its portfolio is in Singapore, and debt is all Singapore dollar-based, the average cost of debt is just 2.7%. The REIT has no refinancing this year, and just $100 million to refinance next year.
“We would rather do an acquisition and fund with some equity rather than raise equity to pay down our debt,” Lee says.
To pare debt and retain cash, FEHT has a distribution reinvestment plan in place. For instance, $23 million saved in the DRP was used for the acquisition of Oasia Downtown. “For the DRP, with strong support from our sponsor [and largest shareholder, Far East Organisation (FEO)], we have a good participation rate and the last two rounds ranged from 60% to 70%. The idea is to run it for this year and, with the amount we raise, pare down debt to 39% without an acquisition,” Lee says.
FEHT has a pipeline of seven projects valued at more than $1 billion. FEO’s project in Sentosa, which is 30%-owned by FEHT, opens in phases from April. It comprises The Village Hotel and The Outpost Hotel, which open in 2Q2019, and The Barracks Hotel — an upscale luxury hotel, which opens in 4Q. In total, the development has 839 rooms.
The 30% stake in Sentosa takes up 5% of FEHT’s 10% development limit. “It’s good enough for us to gain a foothold and average down the cost,” Lee says. FEHT is unlikely to book any NPI from the project this year. Asked when the REIT could acquire the assets, he says: “Next year is the first full year, and it would realistically be something for us to consider two years from now. It will be an arm’s-length transaction and we have to get two valuations; we cannot acquire at higher than the two valuations.”
There is plenty in Singapore for FEHT to acquire. “When you go overseas, you introduce risk. The advantage of being in Singapore is the income is all tax-free,” Lee says. At any rate, any overseas expansion would be into a developed market and, currently, with a large pipeline in Singapore, FEHT is unlikely to rush into anything, he adds.
After a volatile start, FEHT has stabilised and DPU appears to be on an upward trajectory. Yet, some analysts’ recommendations are mixed. For instance, JPMorgan says: “Despite improving [revenue per available room] growth, we still see downside risks to the street’s bullish RevPAR growth assumptions for 2019, owing to slower regional growth and weaker Chinese discretionary spending. As a result, our FY2019/20 DPU estimates are 5% below the street’s. Current depressed valuations of 0.73 times its price-to-book ratio appear to be pricing in the increased risks for the stock.” FEHT’s net asset value as at Dec 31, 2018 was 87.59 cents. JPMorgan retains a “neutral” rating.
Both Maybank-Kim Eng and OCBC Investment Research have “buy” calls for FEHT. “We forecast a 5% recovery in hotel RevPARs and a ramp-up of three Sentosa properties from 2HFY2019 y-o-y to anchor a 6% DPU compound annual growth rate in FY2019/20E. We see upside potential from its higher Singapore RevPAR sensitivity and sponsor’s right-of-first-refusal pipeline,” Maybank-Kim Eng says.
OCBC expects DPU of 4.1 cents this year, up 2.5% y-o-y, and 4.4 cents for FY2020, up 7.3%, excluding acquisitions. The DPU estimates translate into yields of 6.26% and 6.71% for this year and next.
This story appears in The Edge Singapore (Issue 874, week of Mar 25) which is on sale now. Subscribe here