Download Far East Hospitality Trust - Singapore

Singapore Company Guide
Far East Hospitality Trust
Version 6
Refer to important disclosures at the end of this report
| Bloomberg: FEHT SP | Reuters: FAEH.SI
DBS Group Research . Equity
23 Feb 2017
HOLD
Holding pattern
Last Traded Price ( 22 Feb 2017): S$0.595 (STI : 3,122.20)
Price Target 12-mth: S$0.63 (6% upside) (Prev S$0.62)
Potential Catalyst: Recovery in the Singapore hospitality market, and
acquisitions
Where we differ: In line with consensus
Analyst
Mervin SONG CFA +65 6682 3715 [email protected]
Derek TAN +65 6682 3716 [email protected]
What’s New

4Q16 DPU of 1.17 Scts (-4.3% y-o-y) slightly ahead
of expectations

Excess room supply results in 2-7% decline in hotel
and serviced residences RevPAR

Exploring potential acquisition which will boost
DPU
Limited re-rating catalysts. We maintain our HOLD call with a
revised TP of S$0.63. As a Singapore-focused REIT and with
competitive pressures in the Singapore hospitality market that
are expected to persist, we believe there are limited re-rating
catalysts for Far East Hospitality Trust (FEHT) in the near term.
This is despite the inherent long-term value given that FEHT is
trading at c.0.65x P/BV.
Competitive pressure to persist. With 6% increase in room
supply in 2017 versus a projected 4% growth in visitor arrivals,
we believe the Singapore hospitality market will remain under
pressure. Thus, we have pencilled in a 4-5% fall in RevPAR for
FEHT’s hotels and serviced residences. This is turn should
translate to a 4% dip in FY17 DPU before a potential recovery
from 2018 onwards when supply pressure ease.
Strong balance sheet. Even though we are cautious on FEHT’s
near-term earnings, there is significant upside to our forecast if
FEHT deploys its strong balance sheet well. FEHT’s gearing as at
end-December 2016 stood at approximately 32% and its
sponsor provides a clear and visible ROFR pipeline of seven
properties.
Price Relative
Valuation:
After incorporating slightly better performance from FEHT’s
commercial operations, we raised our DCF-based TP from
S$0.62 to S$0.63.
Forecasts and Valuation
FY Dec (S$m)
Gross Revenue
Net Property Inc
Total Return
Distribution Inc
EPU (S cts)
EPU Gth (%)
DPU (S cts)
DPU Gth (%)
NAV per shr (S cts)
PE (X)
Distribution Yield (%)
P/NAV (x)
Aggregate Leverage (%)
ROAE (%)
2015A
115
104
33.2
82.2
4.20
(5)
4.60
(11)
93.9
14.2
7.7
0.6
32.5
4.4
DPU Chng (%):
Consensus DPU (S cts):
Other Broker Recs:
2016A
109
98.4
30.1
78.1
3.30
(21)
4.33
(6)
90.9
18.0
7.3
0.7
32.1
3.6
2017F
108
97.3
64.2
75.1
3.54
7
4.14
(4)
90.7
16.8
7.0
0.7
33.5
3.9
2018F
113
102
67.1
78.2
3.68
4
4.28
3
90.1
16.1
7.2
0.7
33.5
4.1
B: 2
5
4.10
S: 2
1
4.20
H: 4
Key Risks to Our View:
Rebound in demand and acquisitions. Our cautious stance on
FEHT is premised on a supply imbalance in the Singapore
hospitality market. However, a significant rebound in demand,
absorbing the new room supply, and FEHT utilising its strong
balance sheet, would lead to upside risks to our DPU estimates
and TP.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Golden Development Pte Ltd
Golden Landmark Pte Ltd
Far East Organization
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Real Estate / Real Estate Investment Trusts
1,804
1,074 / 760
22.4
10.6
10.1
38.2
0.70
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P.
ASIAN INSIGHTS
ed: TH / sa: JC, PY
VICKERS SECURITIES
Company Guide
Far East Hospitality Trust
WHAT’S NEW
Drag from excess supply
Sentosa hotel project. With a relatively low gearing,
Impacted by Singapore headwinds
FEHT guided that it is exploring the potential to

FEHT delivered a 4Q16 DPU of 1.17 Scts (-4.3% y-o-y).
acquire a hotel from its sponsor.
For FY16, DPU was 4.33 Scts (-5.9%) which was a tad

Average cost of debt stood at 2.5%. There is potential
higher than our estimate of 4.26 Scts and consensus
for FEHT’s borrowing costs to dip marginally as FEHT is
estimates of 4.2 Scts.
about to refinance S$250m debt on lower margins.

While we had expected DPU to be down y-o-y due to

The proportion of fixed rate debt was maintained at
the excess supply in Singapore (4Q16 NPI down 5.4%
71%.
y-o-y to S$24.9m, the slightly better-than-expected

NAV per unit fell to S$0.909 from S$0.939, mainly
results was due to lower-than-expected interest
due to an increase in the number of units outstanding.
expenses as well as higher contribution from FEHT’s
commercial operations (rental of retail and office
Delay in completion of Outpost and Village hotel Sentosa
space) compared to our estimates.

FEHT announced that Outpost and Village Hotel
Sentosa in which it has a 30% stake will now be
Falls in RevPAR for both hotels and serviced residences
completed in 2019 versus the original timeline of

With supply headwinds in Singapore and weaker
2018. The delay is caused by the need to construct an
corporate demand (share of corporates are now at
underground car park. However, the project remains
37% versus 41% in 4Q15), 4Q16 RevPAR for hotels
on budget despite changes to the design.
fell 7.3% y-o-y to S$136. However, this was better
than the 9.2% decline in overall industry RevPAR in
Raise FY17-18F DPU by 1-5%
4Q16. Drilling deeper, hotel occupancy increased

To account for the lower-than-expected interest costs
120bps to 86.5% in 4Q16, partially mitigating the
and higher-than-expected contribution from FEHT’s
8.6% y-o-y fall in ADR.
commercial
operations as well as now assuming 100%

Meanwhile, serviced residences had a better
payout
ratio
versus 97% previously, partially offset by
performance compared to the hotels, with 4Q16
some
downtime
at Orchard Parade hotel as it
RevPAR falling a smaller 2.3% y-o-y to S$176.
undertakes
the
potential
refurbishment of hotel
Occupancy was the main culprit for the fall in RevPAR,
rooms,
we
raised
our
FY17-18F
DPU by 2-5%. In
down 290bps to 79.7%. This offset the 1.2% y-o-y
addition,
we
have
increased
our
DCF-based TP to
increase in ADR.
S$0.63 from S$0.62.
Decline in property values
Maintain HOLD with revised TP of S$0.63

FEHT reported a S$29.5m decline in property value,
 With RevPAR for Singapore likely to remain under
which was attributed to weaker operating
pressure this year resulting in a decline in DPU, we see
performance, partially offset by a slight compression in
limited re-rating catalysts in the near term. Thus, we
cap rates following a change in valuers.
maintain our HOLD call with a revised TP of S$0.63,

However, gearing as at end-December declined
pending the results briefing later this morning. marginally to 32.1% from 32.5% in 4Q15 owing to
the increased value of FEHT’s 30% interest in the
ASIAN INSIGHTS
Page 2
VICKERS SECURITIES
Company Guide
Far East Hospitality Trust
Quarterly / Interim Income Statement (S$m)
4Q2015
3Q2016
4Q2016
% chg yoy
% chg qoq
Gross revenue
28.9
28.0
27.5
(4.6)
(1.7)
Property expenses
(2.6)
(2.7)
(2.7)
4.4
0.1
Net Property Income
26.3
25.4
24.9
(5.4)
(1.9)
Other Operating expenses
(3.3)
(3.2)
(3.2)
(4.8)
(0.8)
Other Non Opg (Exp)/Inc
0.60
(1.9)
4.29
619.1
N/A
Net Interest (Exp)/Inc
(5.3)
(4.9)
(4.8)
8.4
0.7
0.0
0.0
0.0
-
-
FY Dec
Exceptional Gain/(Loss)
Net Income
18.3
15.4
21.2
15.8
37.5
Tax
0.0
0.0
0.0
-
-
Minority Interest
0.0
0.0
0.0
-
-
18.3
15.4
21.2
15.8
37.5
(23.5)
15.4
(8.3)
64.6
nm
Non-tax deductible Items
2.38
4.87
(1.0)
(142.0)
(120.5)
Net Inc available for Dist.
20.7
20.3
20.2
(2.3)
(0.5)
91.1
90.5
90.3
100.0
100.0
100.0
Net Income after Tax
Total Return
Ratio (%)
Net Prop Inc Margin
Dist. Payout Ratio
Source of all data: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 3
Company Guide
Far East Hospitality Trust
Net Property Income and Margins (%)
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Downturn in the Singapore hospitality market. The Singapore
hospitality market faces the challenge of navigating a 6%
increase in hotel room supply this year but at the same time,
only a modest recovery in total visitor days and weak corporate
demand which is typically higher yielding. In such an
environment, we believe hotels, including those owned by
FEHT, will face pressure on occupancy and ADRs. Thus, we
estimate that the price-heightened competition will lead to 45% declines in FEHT’s FY17F hotel and serviced residence
RevPAR/RevPAU.
Some cushion from asset enhancement initiatives. Partially
mitigating the effects of a supply imbalance in the Singapore
hospitality market are the asset enhancement initiatives (AEI)
that FEHT has undertaken. The refurbishments are expected to
help maintain FEHT’s relevance in the market place as well as
boost occupancy and ADR over the medium term. The following
are the AEIs that FEHT has completed across its portfolio: (1)
extension of outdoor refreshment area at Village Residence
Robertson Quay, (2) soft refurbishment of club & suite rooms
and meeting areas at Village Hotel Changi, (iii) reconfiguration
of the serviced office space to create nine additional units as
well as the upgrade of the main lobby, breakfast lounge and
pantry at Central Square (Village Residence Clarke Quay), (iv)
refurbishment of 2- and 3-bedroom units at Regency House,
and (v) upgrading of the swimming pool, function rooms, lobby
area and lobby bar.
Medium-term outlook remains bright. Despite the short-term
headwinds, the medium-term outlook for FEHT remains bright.
With no new hotel land sites being released by the Singapore
government over the last two years, supply could be
constrained from 2018 onwards. In addition, FEHT should
benefit from the opening of the 850-room Sentosa hotel
development in 2018.
Acquisitions yet to be priced in. With gearing at only 32%,
FEHT is well positioned to expand its portfolio through
acquisitions. Assuming FEHT gears up to the 40% level, we
estimate the trust to have c.S$300-350m of debt headroom.
Through its sponsor, Far East Organization, FEHT has a visible
acquisition pipeline. In particular, it has the right of first refusal
over seven properties.
ASIAN INSIGHTS
Page 4
Net Property Income and Margins (%)
Distribution Paid / Net Operating CF
Interest Cover (x)
Source: Company, DBS Bank
VICKERS SECURITIES
Company Guide
Far East Hospitality Trust
Balance Sheet:
Gearing unchanged. FEHT’s gearing at end-4Q16 was stable at
c.32% which is comfortably below management’s 40% and
MAS’s new 45% gearing limits.
Aggregate Leverage (%)
Moderate exposure to rising interest rates. Currently, 71% of
FEHT’s borrowings are under fixed rates, reducing its exposure
to volatility in interest rates.
Share Price Drivers:
Negative near-term sentiment. FEHT’s share price has been
weak over the past year due to a combination of soft tourist
arrivals and large new room supply which has translated into a
fall in RevPAR and DPU. While tourist arrivals are recovering,
new hotel supply should continue to outpace demand. Thus, we
believe there are limited re-rating catalysts for the stock in the
near term.
Key Risks:
Interest rate risk. Any increase in interest rates will result in
higher interest payments that the REIT has to make annually to
service its loans. This reduces the income available for
distribution, which will result in lower distribution per unit
(DPU) for unitholders.
ROE (%)
Distribution Yield (%)
Competitive landscape. The Singapore hospitality market has
been impacted by a decline in tourist arrivals in 2014 and 2015
thus far. With an increase in new hotel supply in 2016 and
2017 and if demand does not recover, FEHT’s earnings may be
impacted.
Company Background
Far East Hospitality Trust (FEHT) is a hospitality stapled group
comprising Far East H-REIT and Far East H-Business Trust. Far
East H-REIT is a Singapore-based real estate investment trust,
which invests in hospitality assets. It owns eight hotels and four
serviced residences.
PB Band (x)
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 5
Company Guide
Far East Hospitality Trust
Income Statement (S$m)
FY Dec
Gross revenue
Property expenses
Net Property Income
Other Operating expenses
Other Non Opg (Exp)/Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Net Income
Tax
Minority Interest
Preference Dividend
Net Income After Tax
Total Return
Non-tax deductible Items
Net Inc available for Dist.
Growth & Ratio
Revenue Gth (%)
N Property Inc Gth (%)
Net Inc Gth (%)
Dist. Payout Ratio (%)
Net Prop Inc Margins (%)
Net Income Margins (%)
Dist to revenue (%)
Managers & Trustee’s fees
ROAE (%)
ROA (%)
ROCE (%)
Int. Cover (x)
Source: Company, DBS Bank
2014A
2015A
2016A
2017F
2018F
122
(11.7)
110
(13.8)
(0.8)
(17.5)
0.0
78.0
0.0
0.0
0.0
78.0
71.3
20.2
91.5
115
(11.0)
104
(13.1)
4.93
(20.4)
0.0
75.0
0.0
0.0
0.0
75.0
33.2
48.9
82.2
109
(10.7)
98.4
(12.6)
(6.3)
(19.8)
0.0
59.6
0.0
0.0
0.0
59.5
30.1
18.6
78.1
108
(11.0)
97.3
(12.5)
0.0
(20.6)
0.0
64.2
0.0
0.0
0.0
64.2
64.2
10.9
75.1
113
(11.4)
102
(13.0)
0.0
(21.6)
0.0
67.1
0.0
0.0
0.0
67.1
67.1
11.2
78.2
(0.6)
(1.7)
(15.5)
100.0
90.4
64.1
75.2
11.3
4.5
3.1
3.9
5.5
(5.8)
(5.8)
(3.9)
100.0
90.4
65.4
71.7
11.4
4.4
3.0
3.6
4.4
(4.9)
(5.1)
(20.6)
100.0
90.2
54.6
71.7
11.6
3.6
2.4
3.5
4.3
(0.7)
(1.1)
7.8
100.0
89.8
59.3
69.4
11.5
3.9
2.6
3.5
4.1
4.3
4.5
4.5
100.0
89.9
59.3
69.2
11.5
4.1
2.7
3.6
4.1
ASIAN INSIGHTS
Page 6
The decline in earnings is
largely a result of a
projected decline in FEHT’s
serviced residence and
hotel RevPAR with a
recovery from 2018
onwards as supply
pressures ease
VICKERS SECURITIES
Company Guide
Far East Hospitality Trust
Quarterly / Interim Income Statement (S$m)
FY Dec
4Q2015
1Q2016
Gross revenue
Property expenses
Net Property Income
Other Operating expenses
Other Non Opg (Exp)/Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Net Income
Tax
Minority Interest
Net Income after Tax
Total Return
Non-tax deductible Items
Net Inc available for Dist.
Growth & Ratio
Revenue Gth (%)
N Property Inc Gth (%)
Net Inc Gth (%)
Net Prop Inc Margin (%)
Dist. Payout Ratio (%)
2Q2016
3Q2016
4Q2016
28.9
(2.6)
26.3
(3.3)
0.60
(5.3)
0.0
18.3
0.0
0.0
18.3
(23.5)
2.38
20.7
27.4
(2.7)
24.7
(3.2)
(7.5)
(5.2)
0.0
8.82
0.0
0.0
8.82
8.82
10.6
19.4
26.1
(2.7)
23.5
(3.1)
(1.2)
(5.0)
0.0
14.2
0.0
0.0
14.2
14.2
4.10
18.3
28.0
(2.7)
25.4
(3.2)
(1.9)
(4.9)
0.0
15.4
0.0
0.0
15.4
15.4
4.87
20.3
27.5
(2.7)
24.9
(3.2)
4.29
(4.8)
0.0
21.2
0.0
0.0
21.2
(8.3)
(1.0)
20.2
(3)
(2)
(13)
91.1
100.0
(5)
(6)
(52)
90.2
100.0
(4)
(5)
61
89.8
100.0
7
8
9
90.5
100.0
(2)
(2)
38
90.3
100.0
Balance Sheet (S$m)
FY Dec
2014A
2015A
2016A
2017F
2018F
Investment Properties
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
2,476
15.6
20.9
0.0
19.3
5.45
2,537
2,439
15.5
25.4
0.0
30.5
10.4
2,521
2,418
16.6
15.4
0.0
34.7
3.97
2,489
2,428
31.6
25.0
0.0
17.1
3.97
2,506
2,431
31.6
20.9
0.0
17.9
3.97
2,506
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Unit holders’ funds
Minority Interests
Total Funds & Liabilities
116
3.28
6.26
680
8.49
1,724
0.0
2,537
36.9
2.80
10.1
780
7.21
1,684
0.0
2,521
292
1.93
10.6
531
7.62
1,646
0.0
2,489
31.8
2.92
10.6
807
7.62
1,646
0.0
2,506
31.8
3.05
10.6
807
7.62
1,646
0.0
2,506
Non-Cash Wkg. Capital
Net Cash/(Debt)
Ratio
Current Ratio (x)
Quick Ratio (x)
Aggregate Leverage (%)
Z-Score (X)
15.2
(774)
27.9
(792)
26.1
(807)
7.57
(814)
8.19
(818)
0.4
0.4
31.3
0.9
1.3
1.3
32.5
0.9
0.2
0.2
32.1
0.9
1.0
1.0
33.5
0.9
0.9
0.9
33.5
0.9
FEHT remains in a strong
financial position with
gearing in the low 30s
Source: Company, DBS Bank
ASIAN INSIGHTS
VICKERS SECURITIES
Page 7
Company Guide
Far East Hospitality Trust
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Income
Dep. & Amort.
Tax Paid
Associates &JV Inc/(Loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Net Invt in Properties
Other Invts (net)
Invts in Assoc. & JV
Div from Assoc. & JVs
Other Investing CF
Net Investing CF
Distribution Paid
Chg in Gross Debt
New units issued
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Operating CFPS (S cts)
Free CFPS (S cts)
2014A
2015A
2016A
2017F
2018F
78.0
0.0
0.0
0.0
2.56
29.0
110
(8.1)
0.0
(15.6)
0.0
0.0
(23.7)
(93.4)
15.6
0.0
(16.3)
(94.1)
0.0
(8.3)
75.0
0.0
0.0
0.08
9.55
26.0
111
(5.0)
0.0
(21.3)
0.0
0.0
(26.3)
(84.0)
21.3
0.0
(17.1)
(79.8)
0.0
4.54
59.6
0.0
0.0
0.04
0.02
36.4
96.0
(8.1)
0.0
(5.1)
0.0
0.0
(13.2)
(78.7)
5.10
0.0
(19.2)
(92.8)
0.0
(10.0)
64.2
0.0
0.0
0.0
18.6
10.9
93.7
(10.0)
0.0
(15.0)
0.0
0.0
(25.0)
(75.1)
16.0
0.0
0.0
(59.1)
0.0
9.56
67.1
0.0
0.0
0.0
(0.6)
11.2
77.6
(3.4)
0.0
0.0
0.0
0.0
(3.4)
(78.2)
0.0
0.0
0.0
(78.2)
0.0
(4.0)
6.04
5.73
5.66
5.92
5.33
4.88
4.15
4.62
4.30
4.08
Equity contribution for
FEHT’s 30% stake in
the 850-room Sentosa
hotel development
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Mervin SONG CFA
Derek TAN
ASIAN INSIGHTS
Page 8
VICKERS SECURITIES
Company Guide
Far East Hospitality Trust
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 23 Feb 2017 08:47:26 (SGT)
Dissemination Date: 23 Feb 2017 09:04:50 (SGT)
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
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the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to
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document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or
persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
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(a)
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Company Guide
Far East Hospitality Trust
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in Far
East Hospitality Trust recommended in this report as of 31 Jan 2017.
2.
DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services:
3.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
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should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
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investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
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VICKERS SECURITIES
Company Guide
Far East Hospitality Trust
Malaysia
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Wong Ming Tek, Executive Director, ADBSR
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