REIT analysis series: Far East Hospitality Trust

Far East Hospitality Trust

Far East Hospitality Trust (“FEHT”) is a pure play Singapore hospitality REIT that owns 9 hotels and 4 service residences as at 31 December 2018. FEHT IPO at 2012 with much fanfare as one of the first hospitality trust to be listed in the Singapore Exchange backed no less by the richest family in Singapore (Far East Organization).

Let’s look at how FEHT fare since then on some high-level metrics.

Price to book value ratio

Price to book value analysis 2012 2013 2014 2015 2016 2017 2018 Current
High 0.96 0.83 0.78 0.60 0.63 0.67 0.69 0.73
Low 1.03 1.24 0.94 0.93 0.74 0.85 0.89

The above information is based on the highest and lowest share price achieved in each financial year divided by the NAV for the year. FEHT IPO at around NAV which is consistent with what most REIT does (similar to recent IPO of ARA and Eagle). However, the price to book value ratio went downhill pretty quickly from 2013 and hit the depth of 0.60 at 2015 before slowly recovering. At current P/B ratio of 0.73 (based on price of 64 cents) which is about 20% above the lowest P/B ratio reached in 2015.

Dividend yield

Dividend yield 2013 2014 2015 2016 2017 2018 Current
High 6.9% 6.8% 8.2% 7.6% 6.7% 6.7% 6.25%
Low 4.6% 5.6% 5.3% 6.4% 5.3% 5.1%

The above information is based on the DPU achieve for the year divided by the highest and lowest share price achieved in each financial year. 2012 is excluded from the dataset as there is no full year record. However, be careful into falling into a trap in buying into high dividend yield counters in times of falling DPU. For example, in 2015, a historical high DPU of 8.2% is achieved based on the 2015 DPU of 4.6 cents divided by share price of 56 cents. However, the yield in subsequent years will decrease due to falling DPU of 4.33 cents (7.7% yield) and 3.9 cents (7.0%). Based on current DPU of 4 cents, an indicator of signs of excessive indicators will be reached if FEHT reached a price of 80 cents which is implying a yield of 5% (based on historical trend). Of course this optimism could also be validated if the subsequent year’s DPU do increase.

Key financial metrics

27 August 2012 to 31 December 2012 2013 2014 2015 2016 2017 2018
Revenue (million) 42.2 122.5 121.7 114.6 109.1 103.8 113.7
Net property income (million) 38.8 111.9 110 103.7 98.4 93.2 102.8
NPI yield 7.2% 4.5% 4.4% 4.3% 4.1% 3.9% 3.9%
Income available for distribution (million) 33.6 94.6 91.5 82.2 78.1 72 75.4
DPU (cents) 2.09 5.64 5.14 4.6 4.33 3.9 4
NAV (cents) 97 98.32 96.97 93.91 90.9 86.94 87.59
Interest cover ratio 10.1 6.9 5.9 4.4 4.3 3.9 3.4
Weighted average debt maturity 4 3.3 3.5 3.3 2.3 3 3.4
Gearing 29.20% 30.9 31.4 32.5 32.1 34.4 40.1

Although the portfolio within FEHT has been relatively stable (with addition of Hotel Rendezvous in 2013 and Oasia Downtown in 2018, all financial metrics has been on a freefall since IPO. DPU has fallen from a high of 5.64 cents for its first full year contribution in 2013 to 3.9 cents in 2017. This also largely explain why the share price has been on a free fall since 2013 as share price of REIT (who are mainly favoured by income investors) are driven towards an acceptable yield.

However, one interesting observation is a few financial metrics start to turn positive in 2018 (including revenue, NPI, Income available for distribution, DPU and NAV. Is turnaround in sight?

Let’s dive into the operating metrics which will drive the financial metrics.

Key operating metrics

FEHT

2012 2013 2014 2015 2016 2017 2018
RevPar 171 166 155 146 139 136 144
RevPau 204 227 220 200 189 175 177

RevPar (revenue per available room) data is obtain from FEHT annual report which basically means the average room rate charged multiply by the average occupancy rate. RevPar decreased 16% since 2012.

RevPau (revenue per available unit) is a similar concept but FEHT used that metric for their service residence. Rev Pau decreased by more than 20% since 2013.

To do a reasonableness check against the sliding rate which will give indication if the falling operating indicators is due to mismanagement, I have extracted the relevant RevPar detail from STB website for ‘upscale’ which some hotels within FEHT belong (e.g. Oasia brand) and Mid-Tier (e.g. Elizabeth Hotel).

STB

2018 2017 2016 2015 2014 2013
Upscale 227 221 222 265 267 269
Mid Tier 147 143 144 176 185 186

Upscale decreased by 16% since 2013.

Mid-Tier decrease by more than 20% since 2013.

Both Upscale and Mid-Tier RevPAR inched upwards in 2018 following downtrend since 2013. The STB trend largely mirror what we see in FEHT which is a freefall since 2013 and a slight improvement in 2018 compared to 2017.

In a nutshell

In short, the falling DPU, share price for FEHT is largely attributed to market forces. Below are some quotes obtain from the 2018 annual report to reflect the challenging operating environment faced by management since listing:

“From 2009 to 2018, total hotel room supply increased by 68.9% (27,128 rooms) or at a CAGR of 5.4% per annum. This is equivalent to adding on average an additional 2,713 rooms each year for 10 consecutive years.”

“A vastly different picture emerges going forward as only 3,816 rooms are expected to enter supply over the next 4 years. This includes the opening of the Far East Hospitality development project on Sentosa in 2019, which will comprise 836 keys over 3 hotels (The Village Hotel Sentosa with 606 keys, The Outpost Hotel with 193 keys and The Barracks with 40 keys). Demand and supply dynamics going forward have now markedly improved and are conducive to improved hotel performance. This should give further confidence for hoteliers to continue to adjust room rates upward as they have started to do in 2018.”

With the lower supply of hotel room coming in the next few years, likelihood of a spring come out from a long winter is high. Furthermore, FEHT has a 30% stake in the Sentosa hotel project together with its Sponsor is finally opening since FEHT first invested in 2014. This will add further DPU support to its current portfolio. With the rising DPU expected from the increase in room rate and contribution from new additions to the portfolio such as Oasia Downtown (in 2018) and Sentosa hotel project, the DPU and share price might be prime for re-rating in the coming years.

In the meantime, investors are paid (in excess of 6%) based on share price of 64 cents and DPU of 4 cents while waiting for the tide that is likely to turn. Lastly, not forgetting they are getting a discount of 27% on well located Singapore properties which you will never get if you want to buy an hotel asset in Singapore.

Investors who are vested will do well to monitor RevPar statistics published by STB and also prepare some warchest in the event the company do a rights issue as FEHT is currently fairly highly geared at around 40% following the acquisition of Oasia Downtown. As an intermediate measure, management have introduced DRP to manage the increase in gearing.

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