Far East Hospitality Trust - OCBC Investment 2020-02-17: Weaker Income Visibility From COVID-19

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Weaker Income Visibility From COVID-19

Far East Hospitality Trust (SGX:Q5T)’s 4Q19 gross revenue was relatively flat at S$28.9m (+0.1% y-o-y) while NPI was down 1.0% to S$26.1m.
Far East Hospitality Trust's 4Q19/FY19 DPU dropped 5.0%/4.8% y-o-y to 0.95 S cent and 3.81 S cents respectively, due to an enlarged base as a result of the implementation of the Distribution Reinvestment Plan. As such, 4Q19/FY19 DPU came up to 25% and 98% of full-year forecast, which met our expectations.

Hotel segment’s performance was stronger in 2H than in 1H19 as 1H19 was impacted by the absence of major biennial events as compared to 1H18. Despite strong leisure demand in 2019, full year hotel RevPAR was down 1.3% y-o-y on the back of 1.3% y-o-y decline in ADR and flat occupancy rate of 89.1%. The decline in ADR from S$162 to S$160 was mainly due to lower contribution from corporate segment and a greater composition of lower-rated leisure business.
Separately, the serviced residence (SRs) segment recorded stronger performance in FY19 as compared with hotels segment, partly attributable to the continued growth in shorter-stay bookings at higher room rates. For FY19, SRs RevPAU grew 2.7% y-o-y, on the back of 3.4% y-o-y growth in ADR to S$217 and a 0.6pp decrease in occupancy to 83.5%.
Revenue from the retail and office spaces declined 0.7% y-o-y to S$21.9m.

Far East Hospitality Trust saw room cancellations mainly from leisure travellers and slowdown in forward bookings since the outbreak of COVID-19. Far East Hospitality Trust’s occupancy declined ~20% since Jan, but was still higher than industry average of 50-60% of occupancy rate, partly helped by SRs segment’s lower room turnover.
We believe that SRs will be less significantly affected than hotels segment given its long term nature of stays and focus on corporate travel.
Management noted the risk of Far East Hospitality Trust’s gross revenue declining to its minimum rent in its master leases should the occupancy fall further below 50%. Far East Hospitality Trust’s gross revenue is protected by the fixed rent component of the master leases, which provide downside protection during adverse economic situations.
In FY19, fixed rent component formed about 72% of the master lease rental. However, given its pure Singapore focused portfolio, we see weaker income visibility and higher downside risk if the COVID-19 outbreak persists and situation worsens in Singapore.
After factoring this potential impact in our model and increasing our COE assumptions from 7.0% to 7.3%, our fair value estimate decreases from S$0.68 to S$0.65.
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Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-02-17

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