Far East Hospitality Trust - UOB Kay Hian 2020-11-02: 3Q20 Differentiated Through Test Of Fire From COVID-19 Pandemic

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - 3Q20 Differentiated Through Test Of Fire From COVID-19 Pandemic

The COVID-19 pandemic has helped us better understand Far East Hospitality Trust’s defensive qualities. Far East Hospitality Trust’s distributable income is more stable due to its master leases with sponsor FEO which runs until 2032. Fixed rents accounted for 72% of rental income from its hotels and serviced residences in 2019.
The change in formula to compute management fees further aligns FEO to unitholders’ interest.
Far East Hospitality Trust trades at P/NAV of 0.68x. Distribution yield could improve to 7.1% in 2022.

Far East Hospitality Trust (SGX:Q5T) reported distributable income of S$17.5m (-14.2% y-o-y) for 3Q20. It has released S$1.9m from distributable income of S$5.5m that was retained during 1H20.

Tourist arrivals continued to be affected by the closure of international borders. Occupancy for its hotels improved 5ppt y-o-y and 7.4ppt q-o-q to 97.3% in 3Q20 due to government contracts for isolation purposes and companies providing accommodation for Malaysian workers who are affected by the Movement Control Order (MCO).
However, average daily rate (ADR) fell 58.1% y-o-y to S$69 as these corporate contracts fetch lower ADR. Overall, RevPAR dropped 55.8% y-o-y to S$67.
Corporate customers accounted for the lion’s share of 63.4% of hotel revenue in 9M20 (3Q19: 34.5%). Southeast Asia also expanded to make up 49.8% of hotel revenue (3Q19: 28.7%).

Occupancy for serviced residences improved 5.3ppt q-o-q to 87.1% in 3Q20 due to long-stay corporate customers. Many corporate customers have extended their leases. However, ADR decreased 19% y-o-y to S$180 due to the lack of transient travellers who provide shorter-stay bookings at higher room rates.
Corporate customers accounted for 81.4% of serviced residence revenue (3Q19: 71.9%). RevPAR eased 20.1% y-o-y.

REIT manager’s fees declined 21.9% y-o-y due to changes in the management fee structure. Base fee was reduced from 0.3% to 0.28% of deposited property from 1 Jan 20. Performance fee was changed from 4% of NPI to 4% of NPI or distributable income, whichever is lower.

Far East Hospitality Trust's finance expense declined 17.5% y-o-y due to repayment of short-term loans and lower interest rates. The average cost of debt has further improved by 0.5ppt y-o-y to 2.4%. Aggregate leverage was stable at 39.5%. There are no term loans due for refinancing in 2020.

The recovery in tourism is threatened by a new wave of COVID-19 infections across Europe and the UK. Inbound travel continues to be impacted by closure of international borders. The timing of recovery is contingent on the development of effective vaccines and accurate rapid antigen tests. We expect a recovery 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 serviced residences in 2019.

Far East Hospitality Trust plans asset enhancement at The Elizabeth Hotel (renovations in main lobby, reception areas, lift lobbies, dinning outlets, function rooms, 156 superior & deluxe rooms, 100 premier rooms), Orchard Rendezvous Hotel (upgrading outdoor refreshment area) and Rendezvous Hotel Singapore (repainting to highlight decorative corbels).
The Elizabeth Hotel will be closed for four months for asset enhancement works once it is taken off from government contracts. Far East Hospitality Trust’s share of the capex is estimated at S$2m.

Far East Hospitality Trust has implemented a freeze on hiring and reduction of overtime across all departments. 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 has reduced total hotel expenditure by 35%.

Far East Hospitality Trust released S$1.9m from distributable income of S$5.5m retained in 3Q20. We have assumed the balance of S$3.6m would be released in 4Q20.

We have pencilled in change in fair value of investment properties at -S$79.4m (portfolio valuation to drop 3%). Thus, Far East Hospitality Trust's NAV per unit has dropped from S$0.86 to S$0.82.

We increase our Far East Hospitality Trust's DPU forecasts for 2022 and 2023 by 2% each on:
1. a reduction in cost of debt by 0.1ppt to 2.4%; and
2. fine-tuning of performance fees.
Maintain BUY.
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Far East Hospitality Trust has demonstrated its defensive qualities with distributable income falling by a milder 14.2% y-o-y in 3Q20 (vs CDL Hospitality Trusts (SGX:J85) NPI: -57.4% y-o-y). Sponsor FEO continues to honour its obligations in master leases which expire in 2032. By accepting lower management fees with the change in formula to compute management fees, the sponsor once again demonstrates its alignment to unitholders’ interest.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-02

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