In line; best leveraged to SG hospitality recovery

• Far East Hospitality Trust's 3Q18 DPU was up 1.9% y-o-y and 4.0% q-o-q, in line with our estimates.
• Our forecasts are unchanged. We see FEHT as providing the only pure exposure to a recovery in Singapore’s hospitality sector. Rising contributions from recently-acquired Oasia Downtown, a 5% y-o-y annual recovery in hotel RevPARs and a ramp-up of three Sentosa properties from 1Q2019 are expected to anchor its strongest 6% DPU CAGR in FY18- 20E.
• We see upside potential from its higher Singapore RevPAR sensitivity and sponsor’s ROFR pipeline.
• BUY to our DDM-based SGD0.75 Target Price (COE 7.7%, LTG 2.0%).

Hotels key driver, sector recovery on track

• Far East Hospitality Trust's 3Q18 revenue rose 11.1% y-o-y/ 7.0% q-o-q while NPI growth was stronger at +11.8% y-o-y/ +7.6% q-o-q. This was driven by y-o-y / q-o-q increases in hotel occupancy to 90.7% as RevPAR jumped 6.6% y-o-y (RevPAR is up 5.8% y-o-y YTD).
• Ex-Oasia Downtown, whose acquisition was completed in Apr 2018, hotel RevPAR rose 3.0% y-o-y. This was in line with expectations.
• Its rebranding of Orchard Rendezvous - previously Orchard Parade Hotel – from Oct should support hotel RevPARs after AEI.
• Meanwhile, sector demand-supply has become more balanced and management sees advantages in holding a higher inventory for a recovery in room rates.
• We estimate that every 1% increase in RevPARs from our assumptions can lift FY18-19E DPUs by 0.6-1.3%. RevPAU growth for serviced residences is likely to be muted as employee relocations remain weak, even though bookings from the finance and manufacturing sectors are picking up. Management expects gradual improvements.

Sentosa hotels to ramp up; B/S stretched for now

• Aggregate leverage was stable at 40.4% following its fully-debt-funded Oasia Downtown purchase.
• Balance sheet appears stretched for now, but there should be medium-term DPU growth levers from its sponsor’s ROFR pipeline of 1,767 rooms as the properties scale up. They include its sponsor’s remaining interests in three Sentosa hotels – The Outpost (193 rooms), Village (606) and Barracks (40) - which are awaiting temporary occupational permits, and are on track to open from 1Q2019.

Swing Factors

Upside

• Earlier-than-expected pick-up in corporate demand.
• Better-than-anticipated RevPAR.
• Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values.

Downside

• Sizeable increases in hotel and SR room supply without commensurate growth in demand.
• Deterioration in global economy, resulting in declines in RevPARs.
• Sharper-than-expected rise in interest rates could increase cost of debt and affect earnings, with higher cost of capital lowering valuations.