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Monday, April 17, 2017

Far East Hospitality Trust (FEHT) AGM & Thoughts

I attended FEHT AGM this evening which was held at Orchard Parade Hotels.

I had quite a bit of hard time finding the hotel and had mistook it earlier for Orchard hotels which was just right opposite the premise. Thankfully I found it right on time, else I'd be late.




It was my first AGM for 2017 that I had attended (3 more to come this and next week) so the usual procedure applies. All I need to bring was an NRIC and a pen to take note. Unitholders are able to obtain the hardcopy of the Annual Report on site.




The ballroom was surprisingly huge and there were LOTS of attendees, mostly retirees. To be frank, I wasn't sure to see that many people. It almost feels like I am attending a blue chip companies in attendance.

I tried to sit strategically to avoid the throwing of chairs between shareholders and management. Okay, I'm just joking here.




Updates from CEO

The CEO gave his usual updates on the performance and some of the operational updates on the assets. Some of those are new insights to me which is the reason why I'd like to hear from the management first hand by attending these sort of AGM, especially companies that I take it seriously and trying to increase my position with.

The CEO reiterated that the past 3 years have been the most difficult for hospitality industry in the last 10 years. Growth in supply has increased 5.1% CAGR from 2013 to 2017, translating to about 3000 rooms per year which is added across our tiny island.

Gross revenues are divided into 3 segments - 65% master rental from hotel operations, 13% from service apartment and 21% from retail/restaurants/commercial space. By divisional segment, 62% comes from leisure and 38% comes from corporate needs.

There are 3 ongoing AEI activities from the Village Residence in Clarke Quay, Orchard Parade Hotel and Regency House. Without going into the nitty details,  they have managed to add 9 additional retail/commercial space for the Clarke Quay premise and do up the swimming pool and 100 rooms to go for Orchard Parade hotel which will be done in phases with limited disruptions.

The company also has debt of $250m due in Aug this year which has been successfully refinanced this month.

There are 8 potential pipelines from the sponsors that the company can acquire and has the first right of refusal. One of them is the 30% stake JV they had with the sponsor on the Sentosa development which is slated to be completed in 2019 (more on this later).

The CEO also reiterated that supply is going to taper off from 2018 onwards and they are able to reasonably forecast this because the government has stopped releasing land lease from 2014 onwards for hotel development activities. Service apartment is excluded.

Q&A Session

There were a lot of questions asked and most of them are quite insightful to say the least.

I'll just summarize a few important ones to take note.

1.) There's at least 4 questions being asked on the Sentosa development further, so I have placed this top of the list. This seems to interest most of the attendees.

The Chairman reiterated that the trust currently holds 30% stake while when they are operationally stabilized they will consider buying the rest of the 70% stake from its sponsor. Again, the key word to take note is operationally stabilized and they are often not usually so until the 2nd/3rd year upon commencement.

Sentosa hotels occupancy are typically in the lower range of 75% to 80% but at a higher rate given the tourism proxy to the Sentosa Island. Village Hotel Sentosa are targeted at middle class who wants to stay at Sentosa but at an affordable range. I personally thought it's a good initiative to build that. The hotels at Sentosa are all rather expensive to stay at.

2.) Someone asked upon the valuation of the properties upon the winding down of the leasehold properties. I think there's a huge debate about the leasehold HDB properties and valuation recently that it prompts this question out from the shareholders.

The management shared that their shortest least of the properties is currently the Orchard Parade Hotels which has 45 years lease left. There is a canal down the hotel which belongs to the government so they do not know if they are able to obtain extension upon the expiry. Having said that, the management agreed that 45 years is still far away and it wont be until the last 20 years that the valuation of the properties start accelerating downwards. By then, they would have initiated and known the progress of the extension discussion with the government on the land.

3.) Someone asked on the hedging of the interests to the fixed rate.

The company currently has 71% debts that are hedged to fixed rate and 29% are variable. The current costs of debt is at 2.5%.

The management shared that for every 1% sensitivity risk analysis (i.e increase from 2.5% to 3.5%), the company would have to pay an additional $2.4m interests costs which translates to about 3% impact to DPU (about 0.22 cents).

4.) Another shareholders asked about the percentage of booking that were coming out of operators agency or aggregators like Priceline or Expedia.

According to the management, the booking that comes from direct website is only 5% and the marketing department has been trying hard to boost the sales coming out from direct booking. 28% of the booking is coming out from the agencies and the management have been trying to negotiate for better discount deals.

5.) On the Airbnb question, the management shared the views that they are a disruptive competitors but since the government has came out with the regulations that listing of residential cannot lease out less than 6 months, the disruptive has been minimized. At the moment, they do not see this as a big disruptive concern as it is mitigated.


Final Thoughts

I'm generally happy with what I heard and saw from attending the meeting.

Whilst outlook remains bleak in the next 1 to 2 years, I remain positive that from valuations point of view, this could be a good bet coming out the next 4-5 years waiting for the sectors to recover while receiving that 7% dividend into your pocket.

I also remain convinced that we have seen the bottom in the share price and all bad news have been priced in so that's where my train of thoughts are coming from.

I've done this strategy similarly with Sabana and CDLHT and are sitting on very nice paper gains so I think this will be a strong keep for me.

Thanks for reading.



7 comments:

  1. Funny that a reit need to pay for 30% to develop the property in Sentosa. The money contributed wont yield any return

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    Replies
    1. Hi Anonymous

      The 30% is a stake which the trusts have on the development. That's not technically the money needed to pay for the development. It's a joint venture stake.

      Delete
  2. Is good to know about the Airbnb think. Is really a huge plus. I failed to connect them when gov announced it. thanks for your write up.

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    Replies
    1. Hi Cory

      Welcome. I should be going for another of my hospitality company next week, lets see what their strategies are.

      Delete
  3. Thanks for the good write up. Much appreciated

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  4. I personally feel the CEO is not very capable. During AGM, there was a shareholder asking about the poor performance, the chairman answered him instead of CEO. Most of time chairman is answering the audience question.

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