Far East Hospitality Trust - UOB Kay Hian 2020-08-03: 2Q20 Rewarded With Fixed Rents While Waiting For Recovery


Far East Hospitality Trust - 2Q20 Rewarded With Fixed Rents While Waiting For Recovery

  • While the hospitality industry is experiencing its darkest hour, Far East Hospitality Trust is able to weather the COVID-19 storm and generate stable income due to its master leases with sponsor Far East Organisation (FEO), which runs till 2032. Fixed rents accounted for 72% of rental income from its Hotels and SR in 2019.
  • Far East Hospitality Trust trades at P/NAV of 0.57x. Distribution yield should improve to 6.4% in 2021.
  • Maintain BUY. Target price: S$0.58.

Far East Hospitality Trust's 2Q20 Results

  • Far East Hospitality Trust (SGX:Q5T) reported distributable income of S$25.7m (-26.5% y-o-y) for 1H20. It has retained S$5.5m from its distributable income to provide for rental rebates and deferment for its retail and office tenants. DPU of 1.03 S cents was down 43.4% y-o-y. Excluding distributable income retained, DPU would be higher at 1.29 S cents (-29.1% y-o-y).

Hotels: Business mix shifted to government contracts.

  • Tourist arrivals were affected by restrictions on international travel and closure of international borders. Thus, Far East Hospitality Trust switched focus to contracts from government agencies for isolation purposes and companies that required their Malaysian workers to be housed in Singapore.
  • We estimate that the new business helped Far East Hospitality Trust maintain occupancy for its hotels at a high of 89.9% (up 24.6ppt q-o-q) in 2Q20, but average daily rate (ADR) declined 62% y-o-y to S$60. Overall, we estimated RevPAR dropped by 61% y-o-y.
  • The reliance on leisure/independent customers was reduced from 68.8% in 1Q20 to 24% in 2Q20. Corporate customers accounted for the lion’s share of 76%. Contributions from Southeast Asia have also expanded from 32% to 47%.

Serviced residences (SR) maintained high occupancy.

  • Occupancy for its SR remained high at 81.8% in 2Q20 due to longer leases from corporate accounts. Many corporate customers have extended their leases. We estimate that ADR decreased 12% y-o-y to S$187 (ADR was previously boosted by shorter-stay bookings at higher room rates). The proportion of revenue contributed by corporate customers expanded from 73.3% to 82.7%. RevPAR eased by 12% y-o-y.

Contributions from commercial premises affected by rental rebates.

  • Revenue from the retail and office spaces decreased by 12.5% y-o-y in 1H20 due largely to rental rebates provided to tenants. Many tenants suspended their business during the 8-week Circuit Breaker period (7 April to 1 June). Management disclosed that occupancy for retail space and offices was 80% and 90% respectively.

Aligning interest with unitholders.

  • REIT manager’s fees declined by 20.5% y-o-y due to changes in the management fee structure. Base fee was reduced from 0.3% to 0.28% of deposited property with effect from 1 Jan 20.

No refinancing risks.

  • Far East Hospitality Trust's finance expenses declined 14.9% y-o-y due to repayment of revolving credit facilities and lower interest rates. The average cost of debt has further improved by 0.3ppt q-o-q to 2.5%. Aggregate leverage was stable at 39.2%. There are no term loans due for refinancing in 2020.

Paid while waiting for recovery.

  • Inbound travel continues to be impacted by the closure of international borders. Timing of recovery for international travel is contingent on an effective vaccine, which is being developed across various countries. We expect recovery to take place in mid-21 and normalcy to return in 2H21.
  • Meanwhile, Far East Hospitality Trust’s master leases with its sponsor provide downside protection and accounted for 72% of rental income from its Hotels and SR in 2019. Management estimates that fixed rents provide a distribution yield of 4% based on current share price.

Staycation provides some reprieve.

  • The government has earmarked S$45m to promote staycations among Singaporeans. Far East Hospitality Trust will receive local guests on staycation at Oasia Downtown and Barracks Hotel in 2H20. The government will set up “green lane” arrangements with partner countries to provide the first wave of corporate travellers.

Prudent to retain 21.5% of distributable income in 1H20.

  • Management estimated the out-of-pocket rental waivers (net of property tax rebate and cash grants provided by the government) for retail and office tenants to be S$2m-3m. We have assumed that Far East Hospitality Trust disburse S$3m of the S$5.5m retained in 4Q20. Our estimated payout ratio for 2020 is 95% (management intends to maintain payout at minimum of 90% of taxable income).
  • Far East Hospitality Trust will focus on cost containment measures to optimise near-term financial performance as well as expedite asset enhancements to prepare for the eventual upturn.

Cost containment initiatives.

  • Far East Hospitality Trust has implemented a freeze on hiring across all departments. Spending on advertising & promotions was reduced by 50% as there were no marketing activities in 2Q20. Far East Hospitality Trust has reduced its reliance on outsourced manpower and has assigned cleaning of public areas to existing housekeeping staff. Its various cost containment initiatives have reduced total hotel expenditure by 30%.

Asset enhancements planned during the slowdown.

  • Far East Hospitality Trust is planning for asset enhancements at The Elizabeth Hotel (renovate lobby and reception areas, lift lobbies, dinning outlets, function rooms and 156 superior & deluxe rooms), Orchard Rendezvous Hotel (upgrade outdoor refreshment area), and Rendezvous Hotel Singapore (repainting).

Far East Hospitality Trust - Valuation & Recommendation

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-03
SGX Stock Analyst Report BUY MAINTAIN BUY 0.68 UP 0.620