Far East Hospitality Trust - DBS Research 2020-07-30: Master Leases A Strong Safety Net

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Master Leases A Strong Safety Net

Far East Hospitality Trust's underlying 1H20 DPU in line with estimates; 21% of 1H20 distributable income retained.
Fixed master lease rents have kicked in for the hotels segment to support hotel revenues.
Potential RevPAR recovery a positive catalyst in 2H20 as local staycation demand kicks in.
Maintain BUY, target price unchanged at S$0.60.

Far East Hospitality Trust (SGX:Q5T) recorded gross revenue and NPI of S$44.3m and S$38.6m, representing 20.6% and 23.1% decline y-o-y respectively on the back of lower RevPAR recorded across the portfolio.
DI fell by 26.5% y-o-y to S$25.7m and the Manager is retaining 21% of DI or c.S$5.5m for the period.
DPU of 1.03 Scts makes up 38% of our full year estimate of 2.70 Scts (or 49% of our estimate including retained DI).
Far East Hospitality Trust intends to maintain at least a 90% distribution policy on a full year basis.

RevPAR declined 42.9% and 4.7% y-o-y to S$79 and S$166 for Far East Hospitality Trust’s hotels and serviced residences respectively.
The hotel business benefitted from government block bookings and Malaysian worker stays in 1H20 with more than half of Far East Hospitality Trust’s hotel portfolio currently being booked by the government.
As such, hotel average occupancy held up well at 77.6% but at a big discounted ADR of S$102 for the period.
Serviced residences continue to benefit from long-lease corporate demand, which contributed 78% to revenues in this segment.
Occupancy at the service residences increased by 1.7 ppt y-o-y to 82.7%, while ADR saw a marginal 6.6% decline to S$200.
We understand that the fixed master lease rents have kicked in for the hotel segment, with a historical breakeven level at c.S$105 RevPAR.
Approximately 30% of hotel expenditure has been shaved off as the properties operate on minimum labour levels with a reduction in advertising and promotion expenses.

Commercial rents typically contribute 20% of gross revenue on an annual basis, with an approximate 1:2 split between office and retail contributions.
The office leases held up well in 1H20 with a relatively high tenant retention rate. Some of the existing retail leases have been restructured to include a higher percentage of GTO rents to tide tenants through periods of low demand.
An average of 1 month and 2 months of rental relief has been extended to tenants within the retail and office space respectively.
The decision to retain c.S$5.5m for the period takes into account the possibility of further rental relief to commercial tenants in 2H20.

Gearing decreased 50bps q-o-q to 39.2% while average cost of debt declined 30bps to 2.5%.
Approximately 60% of loans are hedged on fixed rate terms with no debt maturing for the rest of the year.
Managers in early negotiations for refinancing of loans due in 2021.
Interest coverage ratio stood at 2.7x.

Fixed master leases have kicked in to support hotel revenues over this difficult period, which we had previously estimated to contribute c.97% of our revised FY20F hotel revenues.
The master lessees are entities and affiliates of its Sponsor, Far East Organization, which we think will anchor Far East Hospitality Trust through these tough times.
The relatively more stable serviced residences and commercial rents made up an enlarged 35.6% of total revenue in 1H20 (c. 31.2% pre-COVID).
Accompanied by fixed master lease rents which came into play in 1H20, we think that the likelihood of better top line performance in 2H20 is high.

More than half of Far East Hospitality Trust’s hotel assets are currently booked for SHN (Stay-Home-Notice) orders by the government, which may slowly taper off towards the end of 3Q20.
These properties will then be open to accept staycation bookings as early as September, which will benefit some of Far East Hospitality Trust’s assets that are uniquely positioned in this aspect, such as The Barracks Hotel in Sentosa.
Nonetheless we acknowledge the leap in RevPAR is required for the hotels to go beyond a breakeven level (c. S$105 on blended basis) to be able to generate variable rental contributions above the fixed master lease rents.

We maintain our BUY recommendation on Far East Hospitality Trust, and our target price of S$0.60.
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.
Far East Hospitality Trust currently trades at 0.58x price-to-book, below – 2 standard deviation of its 5-year historical mean. We see minimum downside risk to 2H20 earnings from 1H20 levels, given the strong support from fixed master lease hotel rents and stable contributions from the serviced residences and commercial revenue streams. This leaves room for upside potential should RevPAR deliver a surprise in 2H20 as local staycation demand kicks off.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-07-30

SGX Stock Analyst Report BUY MAINTAIN BUY 0.600 SAME 0.600