Brokers' Take: DBS raises TP for Far East Hospitality Trust to S$0.78 on Central Square divestment

THE divestment of Central Square by Far East Hospitality Trust (FEHT) Q5T for S$313.2 million would unlock significant value for unitholders, as it would minimise income drag and free up capital and balance-sheet capacity for the real estate investment trust (Reit) to pursue other acquisitions, said DBS Group Research.

In a research note on Friday (Dec 3), analysts Geraldine Wong and Derek Tan maintained "buy" on the stock, and raised its target price (TP) for FEHT to S$0.78 from S$0.70 previously.

They said the market has not priced in the sale of the property - which accounts for 8 per cent of its assets - and believed the transacted price, at about 58 per cent premium to net asset value, to be a key catalyst for the stock.

"We believe that investors will be pleasantly surprised with this sale, given the significant premiums achieved, ahead of expectations," they said.

"Given the exit yield that is lower than its cost of debt and the manager will be looking to pare down debt with the divestment proceeds, we do not anticipate much downside to our forward distribution per unit (DPU) estimates from this sale."

FEHT had announced on Thursday (Dec 2) that it has entered into a put and call option to a subsidiary of City Developments Limited for the divestment of Central Square for S$313.2 million, with a potential incentive fee of up to S$18 million, subject to certain conditions being met by Dec 31, 2023.

Should 83.9 per cent of the net divestment proceeds be used to repay loans, Wong and Tan expect the Reit's gearing to fall to 33.5 per cent from about 41.3 per cent.

This would increase FEHT's debt headroom to S$533.6 million, giving the Reit "significant firepower" to undertake acquisitions or potentially acquire additional stakes in its Sentosa joint venture, they said.

Separately, Wong and Tan said FEHT's attractive earnings floor provides downside protection for the stock.

It currently trades at an attractive valuation, said the analysts, offering investors a FY2022 to FY2023 compound annual growth rate of 25 per cent in distributions to about 6.9 per cent, as travel resumes on its path to normalcy.

"While the Omicron strain threatens to be a party pooper, we are comforted by FEHT's downside protection with a significant part of its revenues on a fixed-rental basis, supported by its sponsor," they said.

Therefore Wong and Tan said their revenue per available room assumptions are for a stronger rebound in FY2022, with DPU at 90 per cent of pre-pandemic levels.

CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee also maintained "add" on the stock, though they did not change their target price.

Echoing the DBS analysts, Eing and Lock said FEHT's potential acquisitions after the divestment of the property would help to offset some of the income weaknesses it has due to the pandemic.

Additionally, they noted that FEHT's portfolio is backed by income from master leases and the Reit has no master lease expiry until 2032.

"This will underpin the stability of its DPU," they said.

Units of FEHT were trading S$0.01 or 1.7 per cent higher at S$0.585 as at 4.24 pm on Friday.