Far East Hospitality Trust - UOB Kay Hian 2020-12-02: Downside From Increased Competition Protected By Master Leases

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FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Downside From Increased Competition Protected By Master Leases

• Far East Hospitality Trust faces headwinds from the erosion of average daily rate (ADR) for government contracts and accommodation for displaced Malaysian workers. This is partially offset by Singaporeans going on staycations starting Dec 20. The volume for visitor arrivals remains low, due to the cautious approach to gradually reopen Singapore’s international borders.
• Our DPU forecast is relatively unchanged, as we had previously expected hotels to provide only fixed rents in 4Q20 and 1H21. We expect Far East Hospitality Trust's distribution yield to recover to 4.4% in 2021 and 6.2% in 2022.
• Maintain BUY.

3 Far East Hospitality Trust hotels for staycations

• Far East Hospitality Trust (SGX:Q5T) has deployed three hotels, namely Oasia Downtown, Orchard Rendezvous Hotel and Village Hotel Bugis to welcome Singaporeans going on staycations. The remaining six hotels are on government contracts serving as dedicated Stay-Home-Notice (SHN) facilities and government quarantine facilities (GQFs).

Potential downside from corporate contracts.

• The COVID-19 situation in Singapore has been brought under control. As such, the need for dedicated SHN facilities and GQFs has been reduced. The operating model for such government contracts is now based on open tender since Sep 20. As such, the average daily rate (ADR) for hotels deployed as dedicated SHN facilities and GQFs has been eroded.
• The ADR for accommodation for Malaysian workers displaced by Malaysia’s Movement Control Order has also declined, as some Malaysian workers have started to rent rooms at HDB estates.

Potential upside from staycations.

• All Singaporeans aged 18 years and above will each receive a SingapoRediscovers voucher worth S$100, which can be used to offset cost of hotel stays until end-Jun 21. The SingapoRediscovers vouchers will stimulate local demand for staycations as Singaporeans are unable to travel overseas for holidays, bringing some respite for hotels during the school holidays in November and December.
• Management expects volumes for staycations to pick up when Singaporeans start to redeem their S$100 SingapoRediscovers Vouchers from 1 Dec 20.

No distress despite onslaught of COVID-19 pandemic.

• Financially-strong holders with deep pockets, such as City Developments (SGX:C09) and Far East Organisation, own most of the hotels in Singapore. Thus, there are no distressed sellers and no comparable transaction to act as valuation benchmarks despite the tumultuous COVID-19 pandemic. Valuers have to rely on the DCF methodology to value hotels and serviced residences.

Using Frasers Hospitality Trust as a signpost.

• However, we could take cue from hospitality REITs that have already completed the revaluation of their portfolio of hotels. Frasers Hospitality Trust (SGX:ACV) has completed the revaluation of its portfolio of 15 hotels and serviced residences as at Sep 20. Frasers Hospitality Trust recognised decline in fair value of investment properties of S$136.8m, which translate to a drop of 3.7% in appraised valuation. Its two properties located in Singapore, InterContinental Singapore and Fraser Suites Singapore, registered decline in capital values of 4.7%.
• We have assumed that the appraised valuation dropped by a similar 5% and Far East Hospitality Trust recognised a S$132.3m decline in fair value of investment properties in 2H20. We estimate that Far East Hospitality Trust’s aggregate leverage will deteriorate from 39.5% to 41.6% as a result of the revaluation, which is still well within the cap of 50% imposed by MAS.

Weathering headwinds in 4Q20 and 1H21.

• Singapore has implemented three measures to reopen its international borders and to revive Changi Airport as a global air hub:
  • Singapore has unilaterally opened its borders to travellers from Australia, Brunei, China, New Zealand and Vietnam. Travellers from these countries have to take a swab test upon arrival. They can go about their activities after testing negative but have to use the TraceTogether App.
  • Singapore has established bilateral Green Lane arrangements with Brunei, China, Indonesia, Japan, Malaysia and South Korea. However, these arrangements are limited to essential business and official travel.
  • Singapore has established a 2-way travel bubble with Hong Kong (potentially delayed till 2021). Travellers between the two locations are not subject to quarantine but have to test negative for COVID-19.
• The volume of travellers via the three measures is small. Singapore’s international borders are reopening at a slow and measured pace to minimise the risk of imported COVID-19 cases. The timing of recovery in visitor arrivals is contingent on the availability of effective vaccines and development of accurate rapid antigen tests.
• We expect a COVID-19 vaccine to be authorised for emergency usage in Nov/Dec 20 and approved for usage by the general public in 1Q21. We expect a recovery in visitor arrivals in mid-21 and normalcy to return in 2H21.

Downside protection from high fixed rent component.

• All Far East Hospitality Trust hotels and serviced residences are under master lease agreements with companies within sponsor Far East Organisation (FEO). The fixed rent component from its master leases totalled S$67m per year, which is equivalent to 72% of total gross revenue from its hotels and serviced residences in 2019. These master leases run till 2032.

Getting ready for recovery in 2H21.

• Far East Hospitality Trust is planning for 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 capex is estimated at S$2m.

Earnings revision

• We kept our Far East Hospitality Trust's 2020F DPU forecast unchanged at 2.6 cents. We have trimmed our 2021F DPU forecast by 2.1% to 2.8 cents. Our 2022F DPU forecast is unchanged at 4.0 cents. The impact on our DPU forecast is marginal as we had previously expected hotels to provide only fixed rents in 4Q20 and 1H21.

Maintain BUY on Far East Hospitality Trust

• 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.
• Our target price of S$0.74 is based on DDM (COE: 7.0%, terminal growth: 1.8%). We expect distribution yield to recover to 4.4% in 2021 and 6.2% in 2022.
• Far East Hospitality Trust share price trades at a 2020F P/B of 0.80x, representing a steep 20% discount against NAV/share of S$0.79. We believe the deep discount is unwarranted, given good corporate governance and creditworthiness of sponsor FEO.
• Catalysts to Far East Hospitality Trust share price:
  • Downside protection from fixed rents embedded in master leases with sponsor FEO, which owns 61% of Far East Hospitality Trust.
  • Recovery in occupancy, ADR and RevPAR in 2H21.
  • Acquiring the remaining 70% stake of three Sentosa hotels from sponsor FEO.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-12-02

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