What You Should Know About Far East Hospitality Trust (SGX: Q5T) At Its Share Price of S$0.54
Sudhan P●
Far East Hospitality Trust‘s (SGX: Q5T) share price (technically known as unit price for REITs and trusts) has plunged around 31%, from S$0.78 on 20 January 2020 to S$0.54 at the time of writing.
Market sentiment surrounding Far East Hospitality Trust has certainly been affected ever since the COVID-19 pandemic started in Singapore.
However, does the stapled group present an investment opportunity for long-term investors?
Let’s take a look using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Far East Hospitality Trust is a Singapore-focused hotel and serviced residence hospitality trust.
Currently, the trust has a portfolio of nine hotel properties and four serviced residences, making it Singapore’s largest diversified hospitality portfolio by asset value.
Far East Hospitality Trust’s sponsor is Far East Organization, which has a 61% stake in the trust.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
Far East Hospitality Trust has a financial year that ends on 31 December each year.
Firstly, let’s check out how it has performed in the last five financial years.
| 2015 | 2016 | 2017 | 2018 | 2019 | Compound Annual Growth Rate (CAGR) | |
|---|---|---|---|---|---|---|
| Gross Revenue (S$' million) | 114.6 | 109.1 | 103.8 | 113.7 | 115.5 | 0.2 % |
| Net property income (S$' million) | 103.7 | 98.4 | 93.2 | 102.8 | 104.3 | 0.1% |
From 2015 to 2019, both gross revenue and NPI have increased, even though they have been inconsistent.
For the first quarter of 2020, gross revenue tumbled 18% to S$22.9 million largely due to a decline in the hotels’ master lease rental as a result of the COVID-19 pandemic. Correspondingly, NPI fell 21% to S$19.9 million.
Verdict: Pass
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
Now let’s look at Far East Hospitality Trust’s historical growth of distribution per stapled security (DPS; similar to DPU for REITs).
| 2015 | 2016 | 2017 | 2018 | 2019 | CAGR | |
|---|---|---|---|---|---|---|
| DPS (Singapore cents) | 4.60 | 4.33 | 3.90 | 4.00 | 3.81 | -4.6 % |
Over the past five years, Far East Hospitality Trust’s DPS has fallen, and that’s not a good sign.
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
For 2019, Far East Hospitality Trust had an NPI of S$104.3 million and a portfolio value of S$2.65 billion.
The figures translate to a property yield of 3.9%.
Far East Hospitality Trust fails this criterion as well.
Verdict: Fail
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 March 2020, Far East Hospitality Trust had a healthy gearing ratio (also known as “aggregate leverage”) of 39.5%, which just meets my criterion of below 40%.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
At the end of 2019, Far East Hospitality Trust’s interest coverage ratio stood at 3.1 times, which is below 5 times.
Verdict: Fail
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Far East Hospitality Trust’s hotel portfolio had a strong start in January 2020 but was affected by the onset of COVID-19 thereafter.
Due to that, for the first quarter of 2020, the trust’s hotel portfolio’s average occupancy fell by 23.9 percentage points year-on-year to 65.3%.
However, the latest occupancy rate is much better than Singapore’s industry average of around 41% for medium and large hotels.
The average occupancy of Far East Hospitality Trust’s serviced residence portfolio performed better, improving 3.4 percentage points year-on-year to 83.6%. The strong performance was on the back of long pre-existing leases and lease extensions into February and March.
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
The majority of Far East Hospitality Trust’s gross revenue is from fixed rent.
The rent falls under master leases that have a tenure of 20 years from 2012, with an option to renew for an additional 20 years.
Therefore, in my opinion, the rental reversion criterion is not applicable to Far East Hospitality Trust since there’s no option to renew leases on an ongoing basis every three years or so, unlike other REITs.
Verdict: Not Applicable
8. Growth Prospects Check
One way for Far East Hospitality Trust to grow is through acquisitions. In its 2019 annual report, the trust said:
“The REIT Manager actively pursues acquisition opportunities in the market that provide attractive cash flows and yields to enhance the returns to Stapled Securityholders to boost future income and capital growth.”
On that front, Far East Hospitality Trust has an acquisition pipeline of seven properties under the right of first refusal (ROFR) agreement with its sponsor, Far East Organization.
The ROFR arrangement ensures that Far East Organization offers the properties to Far East Hospitality Trust for purchase consideration first before any other company.
Over the longer term, Far East Hospitality Trust could also benefit as the tourism industry recovers from the COVID-19 pandemic and transforms itself to attract more visitors to Singapore.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Far East Hospitality Trust’s current unit price of S$0.54, it has a price-to-book (PB) ratio of 0.63x, which is below the five-year average PB of 0.72x.
Verdict: Pass
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Far East Hospitality Trust’s unit price of S$0.54, its distribution yield stands at 7.1%, based on 2019 DPS.
Potential investors should note that Far East Hospitality Trust’s 2020 DPS is likely to fall due to the business impact from the COVID-19 pandemic.
Verdict: Pass
The Final Verdict
Far East Hospitality Trust has a final score of 6/9.
Even though the trust may look cheap right now, I won’t be investing in it given its slow growth in gross revenue and NPI, and falling DPS from 2015 to 2019.
However, I’m keen to find out if Far East Hospitality Trust’s growth factors actually translate to higher DPS post-pandemic.
Therefore, I’d place Far East Hospitality Trust on my watchlist.
Would You Invest In Far East Hospitality Trust?
Come discuss your thoughts and more in our Seedly Community under a page specifically dedicated to Far East Hospitality Trust (SGX: Q5T).
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
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