4QFY18 Recovery; RevPAR Ramp-up Ahead

• We hosted an NDR for FAR EAST HOSPITALITY TRUST (SGX:Q5T) in Singapore following its 4QFY18 results. Key highlights include:
  1. drivers of the recovery in 4QFY18 results;
  2. positive growth outlook for its Singapore hotels and serviced residences into FY19-20; and
  3. DPU growth levers from its sponsor’s assets in the medium term.
• We fine-tuned our estimates and marginally lowered FY19/20E DPUs (2-4%) on higher interest expense and introduced FY21. Our DDM-based SGD0.75 Target Price (COE: 7.7%, LTG: 2.0%) is unchanged.
• We forecast a 5% recovery in hotel RevPARs and a ramp-up of three Sentosa properties from 2H19 y-o-y to anchor a 6% DPU CAGR in FY19-20E.
• We see upside potential from its higher Singapore RevPAR sensitivity and sponsor’s ROFR pipeline. BUY.

Recovery Gained Traction in 4Q18

• Revenue growth was 12.4% y-o-y in 4Q18 driven by both its hotel and serviced residence (SR) segments on the back of stronger occupancies and RevPARs/RevPAUs. The improvement in its hotels portfolio with RevPAR up 7.5% y-o-y in 4Q18 and 6.2% y-o-y for FY18 reflects the recovering sector fundamentals, led by a 6.2% y-o-y increase in tourist arrivals in 2018.
• Meanwhile, Far East Hospitality Trust's SRs witnessed a sharp turnaround with RevPAU up 7.5% y-o-y vs. -3.4% and -5.7% over 1Q-3Q driven by stronger occupancies (up y-o-y from 78.2% to 84.3%).

Growth Momentum Into FY19-20

• Management expects FY19-20 growth momentum to be strengthened by easing supply (to 1.5% in 2018-20E from 5.1% CAGR 2013-17). This will be further supported by the completion of renovation works and rebranding efforts at its Orchard Rendezvous hotel where overall RevPAR has been boosted by 10%, with higher corporate demand contribution.
• We forecast RevPAR growth of 5-6% in 2019-20E, on stronger volume growth and a pick-up in yields.

Sponsor’s Assets - Medium-term DPU Growth Levers

• We see 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 Village (at 606 rooms), Outpost (193), and Barracks (40) - and Oasia West Residences, a 116- room SR.
• The first two properties are set for official opening from Apr 2019, and their pricing strategies are correct in our view compared to other higher-priced accommodation options on Sentosa island.

4Q18 Results in Line With Consensus; Slight Miss Vs. MKE

• Far East Hospitality Trust’s revenue rose 12.4% y-o-y, while NPI growth was stronger at +13.9% y-o-y, in line with consensus but 6% below our estimate of +17.5% y-o-y. This was driven by increases in occupancies, for its hotels, which were up y-o-y from 85.4% to 86.2%, and its SRs, which rose y-o-y from 78.2% to 84.3%.
• Hotel RevPAR jumped 7.5% y-o-y in 4Q18 and 6.2% y-o-y for FY18. Excluding the Oasia Downtown, whose acquisition was completed in Apr 2018, hotel RevPAR rose 4.0% y-o-y in 4Q18 and 3.5% y-o-y for FY18. This was in line with expectations and the overall market performance.
• Its rebranding of Orchard Rendezvous - previously Orchard Parade Hotel – from Oct should support hotel RevPARs after its AEI with a higher contribution from corporate travellers.

Portfolio Valuation Up on Oasia Downtown Deal

• Far East Hospitality Trust’s AUM has risen by 10.6 y-o-y% to SGD2.6b as of end-Dec 2018 with the Oasia Downtown acquisition.
• There was a change in valuers to Savills, which led to increased cap rate assumptions for Far East Hospitality Trust’s hotels by about 25bps to 4.75-5.25%, while Knight Frank has lowered inputs on cap rates for its SRs to yield 3.25-3.75%.

Balance Sheet Stretched for Now

• Aggregate leverage was stable at 40.1% following its fully-debt-funded Oasia Downtown purchase completed in Apr 2018. The dividend reinvestment plan is a sound step, with about SGD22m taken up (at SGD11m per quarter, according to management), although its balance sheet appears stretched for now on any potential larger deals.

Source: Maybank Kim Eng Research - 14 Feb 2019