Far East Hospitality Trust has managed to outperform its hospitality peers, having its gross revenue and NPI fall the least due to their master lease agreement. I’ve written an article on FEHT prior to this and made a forecast on their FY2020’s DPU performance. Let’s take a quick look at the 1H results of Far East Hospitality Trust to see how they did.
Read Also : 4 Local Hospitality REITs! What About Far East Hospitality Trust?
1. Gross Revenue and NPI Cushioned By Master Leases
| Year on Year Difference | 1st Half 2020 | 1st Half 2019 |
|---|---|---|
| Gross Revenue | S$44.27 million (-20.6%) | S$55.725 million |
| Net Property Income (NPI) | S$38.604 million (-23.1%) | S$50.186 million |
Thanks to Far East Hospitality Trust’s master leases, the gross revenue and NPI fell the least amongst its peers. What is a master lease agreement? Essentially, it is an agreement whereby the rental will comprise of a fixed rent and a variable rent. As per their Q1 FY2020 business update, the fixed rent portion makes up 58% of their FY2019 gross revenue. Thanks to the master lease agreement, FEHT has managed to protect its downside and outperform its peers.
2. Distributable Income and DPU Followed Suit
| Year on Year Difference | 1st Half 2020 | 1st Half 2019 |
|---|---|---|
| Distributable Income | S$25.689 million (-26.5%) | S$34.966 million |
| Distribution Per Unit (DPU) | 1.03 cents (-43.4%) | 1.82 cents |
Far East Hospitality Trust’s distributable income and DPU followed suit, falling by about 26%. FEHT did retain 20% of their distributable income which is why the DPU fell by 43.4% when compared to the year prior. If they distributed the DPU fully, the DPU would stand at 1.29 cents, representing a 29.1% drop from the year prior.
3. Worrying Financials
| As at 30 June 2020 | |
|---|---|
| Aggregate Leverage | 39.2% |
| Interest Coverage | 2.7x |
| Average Cost of Debt | 2.5% |
Far East Hospitality Trust’s balance sheet looks worrying at the moment with their high gearing of 39.2% and interest coverage ratio of 2.7x. If their interest coverage ratio falls below 2.5x, they can only gear up to 45% rather than the new 50% ceiling that MAS has put in place. This puts FEHT in a very worrying position because this severely limits their growth potential.
The silver lining to this is that there is little debt maturing in FY2020 which gives them some buffer time to prepare for the debts maturing in FY2021.
4. Asset Enhancement Initiatives
Far East Hospitality Trust shared in their 1H2020 results that they have 3 AEIs planned. I personally like the fact that FEHT has taken a step forward in growing their assets through AEI in these tough times. When there is a lack in tourism demand, hospitality REITs should maximize this time and do as many AEIs as possible so that when the tourism demand returns, customers can expect a new and improved hotel to stay in. I’ve shared the scope of the AEIs below.
1. Renovation of The Elizabeth Hotel
The proposed scope of the AEI is as such :
▪ Lobby and reception area
▪ Main lift lobby and circulation areas
▪ All-day dining outlet
▪ Function rooms
▪ 156 Superior & Deluxe rooms
▪ 100 Premier rooms
▪ Guestroom floor lift lobbies and corridors
2. Upgrading of the outdoor refreshment area at The Orchard Rendezvous Hotel
The proposed scope of the AEI is as such :
▪ Floor and wall finishes
▪ New canopy system
▪ Landscape enhancement
▪ New finishes to the forecourt
3. Building repainting of Rendezvous Hotel Singapore
The proposed scope of the AEI is as such :
▪ Podium block – different paint colours for the walls, pillars and decorative corbels
▪ Tower block – single paint colours and darker tone for grooves
Final Thoughts
Overall, the 1H results of Far East Hospitality Trust is in line with my expectations. In my previous article covering FEHT, I made forecast on their FY20 DPU. My forecast was that the DPU would fall by a conservative 35%. We’ll need to wait for the 2H2020 to see if my forecast holds true. Nonetheless, I’m satisfied with FEHT’s performance so far in FY2020. They even took it a step further by cutting the REIT manager’s fees by about 14.2%.
Though FEHT’s low ICR and high gearing does worry me because this will hinder their growth potential by a huge margin. If they want to do any meaningful acquisitions, they will most likely have to do a huge equity fundraising (EFR) via a rights issue instead of a preferential offering This is because rights issues are done at a larger discount to current price as compared to preferential offerings. As such, they will need to make it attractive enough for shareholders to invest more capital in the REIT.