Far East Hospitality Trust - UOB Kay Hian 2020-05-05: 1Q20 Things Can Only Get Better


Far East Hospitality Trust - 1Q20 Things Can Only Get Better

  • The 1Q20 business update demonstrated Far East Hospitality Trust’s resiliency with its hotels portfolio providing fixed rents and downside protection. Its serviced residences portfolio outperformed with occupancy improving 3.4ppt y-o-y to 83.6%, driven by higher corporate demand.
  • Distributable income was near the trough during 1Q20 and things can only get better.
  • Far East Hospitality Trust trades at a P/NAV of 0.58x and distribution yield should improve to 7.3% in 2021.

Far East Hospitality Trust 1Q20 Results

Hotels: Downside protection from fixed rents.

  • The hotel portfolio experienced a strong start in January. However, visitor arrivals started to fall after Singapore imposed border restrictions to prevent imported cases of COVID-19 on 15 Mar 20. Occupancy for its hotel portfolio slipped 23.9ppt y-o-y to 65.3%, while Average Daily Rate (ADR) declined 8.3% y-o-y to S$144 in 1Q20.
  • The proportion of revenue contributed by leisure/independent customers contracted 0.8ppt y-o-y to 68.8%. The proportion of revenue contributed by guests from Southeast Asia expanded by a significant 7ppt y-o-y to 32.1%.
  • On the contrary, contributions from North Asia and South Asia gave up ground due to the travel restrictions. RevPAR decreased 32.8% y-o-y to S$94.

Serviced residences: Increased demand from corporate customers.

  • Occupancy for its serviced residences portfolio improved 3.4ppt y-o-y to 83.6% in 1Q20. Far East Hospitality Trust benefitted from long pre-existing leases and lease extensions into February and March.
  • Companies advised their employees to stay in place and to not travel back to their home countries. Some guests had also decided to extend their stay in Singapore as the COVID-19 outbreak worsened in their home countries. ADR decreased marginally by 1.8% y-o-y to S$213. The proportion of ted by corporate customers expanded 2.1ppt y-o-y to 73.3%. RevPAR increased 2.3% y-o-y to S$178.

Minimal impact from alternative businesses.

  • All Singaporeans and Permanent Citizens returning to Singapore from overseas have to serve a 14-day stay-home notice (SHN). According to media reports, Far East Hospitality Trust has set aside a total of 1,066 beds at Village Hotel Albert Court, The Elizabeth Hotel and Village Hotel Sentosa (30% stake) for stay-home notice returnees up till 31 May.
  • Far East Hospitality Trust is also providing accommodation for Malaysian workers stranded in Singapore after the Malaysian government imposed the movement control order (MCO) and shut its borders. These two businesses had a minimal impact on the hotels portfolio during 1Q20 as the associated efforts started in the later part of March.

Review of management fee structure.

  • With effect from 1 Jan 20, base fee will be reduced from 0.3% to 0.28% of deposited property, amounting to savings of S$0.54m or 6.7% of 2019 management fee. Performance fee would also be reduced from 4.0% of NPI to 4.0% of NPI or 4.0% of annual distributable amount, whichever is lower. The reduction amounted to S$1.2m or 28.8% of 2019 management fee.
  • The change in fee structure for base fee and performance fee reduces total management fees by S$1.74m or 14.2% if these changes were applied retrospectively in 2019.

No refinancing risks.

  • Finance expenses declined 7.8% y-o-y due to repayment of short-term loans and lower interest rates. The average cost of debt improved by 0.1ppt q-o-q to 2.8%. Aggregate leverage is stable at 39.5%. There are no term loans due for refinancing in 2020.

Anticipate recovery in 4Q20.

  • Inbound travel will continue to be impacted over the next few months. We expect occupancy to deteriorate to 35% for hotels and 75% for serviced residences. Visitor arrivals, whether corporate or leisure, can only recover after travel restrictions are lifted. Management expects a partial recovery in 4Q20 and normalcy to return at end-20.

Step-up of cost containment measures amid COVID-19 outbreak.

  • Far East Hospitality Trust has implemented a freeze on hiring with only critical positions being evaluated case-by-case. Staff have to clear their annual leave by Jul 20. The use of overtime labour as well as casual labour has been kept to a minimum.
  • Far East Hospitality Trust has reduced its reliance on outsourced manpower and has re-assigned these tasks to existing staff to undertake these activities in-house. Utilities have been shut down on unoccupied floors to conserve energy.

Asset enhancements planned during the slowdown.

  • Far East Hospitality Trust plans to renovate The Elizabeth Hotel, upgrade the main electrical system at Orchard Rendezvous Hotel and repaint Rendezvous Hotel Singapore. It also intends to install cable network infrastructure to provide high-speed internet access and smart TVs at four hotels.

Downside protection from master lease agreement.

  • The negative impact from the outbreak of COVID-19 is mitigated by its master lease structure, under which 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%. Sponsor Far East Organisation (FEO) owns 61% of Far East Hospitality Trust.

Maintain BUY.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.62 UP 0.500