Far East Hospitality Trust (FEHT) has its full presence in Singapore with an asset value of S$2.5bn as of Dec 22 and listed on Aug12. This portfolio encompasses 12 properties, including 9 hotels and 3 serviced residence, collectively 3,015 hotel rooms. It also has a total of 177 units of retail and office spaces in 8 of its properties. All properties operate under a Master Lease Agreement, with rental based on a fixed component and a variable component which linked to the property’s operational revenue. FEO Hospitality Asset Management Pte Ltd serves as the manager for FEHT. The Sponsor, Far East Organization is the largest private property developer in Singapore.
Key Investment Merits
We initiate coverage with a BUY rating and a target price of S$0.79 based on DDM valuation, COE of 6.5%, and terminal growth of 1.5%. We expect a DPU of 3.79 cents for FY23e and 3.95 cents for FY24e, translating into yields of 5.6% and 5.8%, respectively.
Gross revenue consists of Master lease rental, Retail, and office revenue. In 3Q23, the Hotel segment contributed 56.3% to the total gross revenue, while Serviced Residence accounted for 14.4%, and commercial premises comprised 6.5%. Revenue for the hotel and serviced residence segment is calculated based on the operating period multiplied by the average daily rate and average occupancy rate. Commercial rental income is generated by leasing the Excluded Commercial Premises in the Properties directly to individual tenants.
Master Lease Structure
The initial term of the Master Lease Agreements for each of the Properties will be 20 years from the Listing Date (Aug2012) with another 20 years‘ optional extension.
The Master Lease Agreements consist of both a Fixed Rent component and a Variable Rent component. Variable rent is calculated by combining 33% of the Property’s Gross Operating Revenue and a specified percentage of Gross Operating Profit (which varies across properties), minus the Fixed Rent. In cases where the calculation of the Variable Rent results in a negative value, the Variable Rent will be considered as zero.
As visitor arrivals began picking up from the 2Q22, operational performance has gradually improved to levels above the minimum fixed rent from the master leases. By the end of 2022, half of the REIT’s properties comprising 3 hotels and all 3 serviced residence exceeded the minimum fixed rent.
FEHT holds 30% interest in Fontaine Investment Pte Ltd (“FIPL”), a joint venture company established to develop a hotel site in Sentosa. Therefore, FEHT directly has a 30.0% stake in a joint venture for the development of Village Hotel Sentosa, The Outpost, and The Barracks. Joint ventures are equity accounted for, and are therefore included in the Share of profit of joint ventures under the income statement.