Far East Hospitality Trust - UOB Kay Hian 2020-02-17: Weathering The Outbreak Of COVID-19

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FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Weathering The Outbreak Of COVID-19

• Far East Hospitality Trust (SGX:Q5T)’s 4Q19 DPU of 0.95 S cents (-5.0% y-o-y) is in line with our expectations.
• Industry-wide occupancy for hotels dropped to 50-60% in February. Downside is protected by Far East Hospitality Trust’s master lease structure, whereby fixed rents accounted for 72% of 2019 gross revenue. Its Serviced Residences segment, which serves long-staying corporate customers, is more resilient.
• We cut our 2020 DPU forecast by 33%. Downgrade to HOLD as newsflow could get uglier in the near term.
• Entry price: S$0.60.

FEHT's 4Q19 RESULTS

• Far East Hospitality Trust (SGX:Q5T) reported DPU of 0.95 S cents for 4Q19 (-5.0% y-o-y), bringing DPU to 3.81 S cents for 2019 (-4.8% y-o-y). See Far East Hospitality Trust Dividend History. Distributable income declined 1.7% y-o-y. The steep contraction of DPU was caused by dilution from its dividend re-investment plan (DRIP).
• See Far East Hospitality Trust Announcements.

Hotels: Occupancy crossed the 90% mark.

• Occupancy for its Hotels portfolio improved 0.4ppt y-o-y to 86.6% in 4Q19. Average daily rate declined 1% y-o-y to S$163 due to weakness in corporate demand. The proportion of revenue contributed by Leisure/Independent customers expanded 0.4ppt y-o-y to 67.3%.
• Growth by source market was driven by North Asia (up 1.3ppt y-o-y) and South Asia (up 1.2ppt y-o-y), which contributed 22.1% and 14% of revenue respectively. RevPAR decreased marginally by 0.6% y-o-y to S$141.

Serviced residence: 4th consecutive quarter of yoy increase in ADR.

• ADR increased 2.6% y-o-y to S$217 in 4Q19. Serviced Residences portfolio benefitted from shorter-stay bookings at higher room rates (eg 1-week stay for families on vacation). The proportion of revenue contributed by Leisure/Independent customers expanded 4.5ppt y-o-y to 30.5%.
• Far East Hospitality Trust saw growth from corporate customers from the Services sector. Average occupancy edged lower by 0.6ppt y-o-y to 83.7%. Thus, RevPAR increased 1.9% y-o-y to S$182.

Maintained average cost of debt at 2.9%.

• In Oct 19, Far East Hospitality Trust extended a 2-year S$100m term loan due to mature in Apr 20 to a 2.5-year S$60m term loan and 5-year S$40m term loan. There are no other term loans maturing in 2020.

STOCK IMPACT

Anticipate short-term negative impact from outbreak of COVID-19.

• If the duration of the COVID-19 outbreak mirrors that of SARS, management expects the hospitality industry to stage a recovery from mid-20 onwards. Negative impact is mitigated by the diversified geographical mix of its source markets, with each country constituting less than 10% of portfolio revenue.

Hotels suffer brunt of drop in visitor arrivals.

• Its hotels (69.2% of 2019 gross revenue) experienced cancellations in February (mainly tour groups in the leisure segment), although the pace of cancellation has slowed over the past one week. However, forward bookings have also been reduced. Occupancy for its hotels has dropped by 20-30ppt.
• Far East Hospitality Trust's occupancy for hotels is slightly better than industry average of 50-60% for the month of February. Average room rate (ADR) is holding up as the mix of guests has shifted to corporate customers and free independent travellers (transient).

Downside protection from master lease agreement.

• The negative impact from the COVID-19 outbreak is mitigated by its master lease structure, whereby fixed rents accounted for 72% of Far East Hospitality Trust's 2019 gross revenue.
• Management estimated that fixed rents kick in when occupancy falls below 70%. In the event that all hotels and serviced residences are only providing fixed rents, while contributions from commercial spaces is unchanged, management estimated distribution yield at 3.5% based on current Far East Hospitality Trust Share Price.

Serviced Residences more resilient.

• Its Serviced Residences (11.8% of 2019 gross revenue) segment is not significantly impacted by cancellations as the bulk of guests is long-staying corporate customers (average length of stay: 29 days). Travellers and expatriates who are stranded in Singapore and are unable to return to their home countries have also shored up occupancy.

Commercial segment more resilient.

• Commercial office and retail spaces, which accounted for 19% of 2019 gross revenue, are also unaffected.

EARNINGS REVISION/RISK

• We cut our 2020 DPU forecast by 33% to 2.73 S cents. We expect occupancy for Hotels and Serviced Residence to drop 30ppt and 10ppt y-o-y respectively to 55% and 75% in 1H20.
• We expect ADR for Hotels and Serviced Residence to drop 15% and 5% y-o-y respectively to S$140 and S$200. Thus, we foresee RevPAR dropping by 45% for Hotels and 18% for Serviced Residence in 1H20.
• We expect a gradual recovery in 2H20.
• We expect DPU to rebound 43% to 3.9 S cents for 2021.

RECOMMENDATION

• Downgrade to HOLD and lower our target price, based on DDM (required rate of return: 6.5% (from 6.75%), terminal growth: 0.5% (from 1.5%)).
• Entry price is S$0.60.
• Distribution yield is 4.0% for 2020, but should rebound to 5.8% for 2021.
• See Far East Hospitality Trust Share Price; Far East Hospitality Trust Target Price; Far East Hospitality Trust Analyst Reports; Far East Hospitality Trust Dividend History; Far East Hospitality Trust Announcements; Far East Hospitality Trust Latest News.

SHARE PRICE CATALYST

• Recovery in occupancy and ADR in 2H19.
• Yield-accretive acquisitions, including injections from sponsor FEO.
• Acquiring the remaining 70% stake of three Sentosa hotels from FEO.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-17

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