S-REITs Weekly - UOB Kay Hian 2020-05-12: Slightly Eased By 2% Last Week After Massive Gain

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

S-REITs Weekly - Slightly Eased By 2% Last Week After Massive Gain

S-REITs eased slightly by 2.0% last week after massive gain of 9.3% the previous week. Lendlease REIT (SGX:JYEU) and Elite Commercial REIT (SGX:MXNU) gained marginally after posting in-line with forecasts.
Mapletree North Asia Commercial Trust (SGX:RW0U) lost 6.3% due to the resumption of social unrest in Hong Kong.
There were also weaknesses in hospitality REITs − Far East Hospitality Trust (SGX:Q5T) (-5.8%), ARA US Hospitality Trust (SGX:XZL) (-4.7%) and Ascott Residence Trust (SGX:HMN)(-4.5%).

We turn the spotlight on Far East Hospitality Trust (SGX:Q5T) (BUY/Target: S$0.62) due to downside protection from fixed rents embedded in its master leases.
Maintain OVERWEIGHT.

UOBKH S-REIT Index declined slightly by 2.0% to 226.9 last week. The reduction in local Covid-19 transmission and easing of circuit breaker measures provide basis for optimism. From 12 May, food manufacturers, food retail outlets, laundry services, barbers and pet supplies will resume operations. From 19 May, schools will resume lessons in small groups, initially focusing on graduating cohorts taking national examinations. However, share prices mostly consolidated after hefty gains the previous week.

First REIT (SGX:AW9U), ESR REIT (SGX:J91U), Lendlease REIT (SGX:JYEU) and Elite Commercial REIT (SGX:MXNU) registered moderate gains of 2.5%, 1.5%, 0.9% and 0.7% respectively.
Lendlease REIT reported DPU of 1.28 S cents for 3QFY20 while Elite Commercial REIT reported DPU of 0.74 pence for the period 6 Feb 20 to 31 Mar 20. Both results were in line with forecasts provided in their IPO prospectus.

FEHT's 1Q20 business update in line with expectations. 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.
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. Sponsor Far East Organisation (FEO) owns 61% of Far East Hospitality Trust.
Review of management fee structure. From 1 Jan 20, base fee was reduced from 0.30% to 0.28% of deposited property. Performance fee was reduced from 4.0% of NPI to 4.0% of NPI or 4.0% of annual distributable amount, whichever is lower. 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. Far East Hospitality Trust does not have any term loans due for refinancing in 2020.
Anticipate recovery in 4Q20. Inbound travel will be impacted over the next few months. 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.

Far East Hospitality Trust trades at an attractive P/NAV of 0.58x and distribution yield should improve to 7.3% in 2021. Our target price of S$0.62 is based on DDM (required rate of return: 7.5%, terminal growth: 1.8%).
See report: Far East Hospitality Trust - UOB Kay Hian 2020-05-05: 1Q20 Things Can Only Get Better.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-12

SGX Stock Analyst Report BUY MAINTAIN BUY 0.620 SAME 0.620