Far East Hospitality Trust - CGS-CIMB Research 2021-02-11: Master Lease Income Buffers Volatility

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Master Lease Income Buffers Volatility

Far East Hospitality Trust's FY20 DPU of 2.41 cents (-36.7% y-o-y) came in line at 95% of our forecast.
Hotel and Serviced Residence q-o-q RevPAR declined. Demand shifted to alternative housing.
Reiterate ADD. Far East Hospitality Trust's DPU backed by master lease income. Trading at -1x s.d.

Far East Hospitality Trust (SGX:Q5T)’s FY20 DPU of 2.41 cents (-36.7% y-o-y) was in line with our expectations at 95.4% of our FY20F. 4Q20 revenue and NPI declined 11% and 12% q-o-q.
Hotel segment (64% of 4Q20 revenue) was the hardest hit, with an 18% decline in revenue q-o-q. Service Residence (SR) (+8% q-o-q) and commercial segment (+2% q-o-q) revenue improved q-o-q which we believe was due to rental rebates in the previous quarter.
Far East Hospitality Trust released the retained S$5.3m from 1H20, indicating no cash flow concerns.
Asset valuation fell 4.4% y-o-y (hotel -4.7% vs Service Residence -3.3% y-o-y).
Gearing increased from 39.5% to 40.9% accordingly.

Based on our estimates, hotel RevPAR (revenue per available room) declined 9% q-o-q in 4Q20 on lower occupancy (- 9.5% points q-o-q) due to lower demand from foreign workers as they switch to other housing alternatives. ADR (average day rate) was flat q-o-q at S$84 and Far East Hospitality Trust believes that it should be supported at this level in the near term.
Only 3 of Far East Hospitality Trust’s 9 wholly-owned hotels are available for leisure guests. As borders remain closed, we expect its hotel business to continue to be supported by master lease income in 2021.
The recovery of hotel will hinge on the pace of COVID-19 vaccinations in Singapore. Once the majority of Singapore residents are vaccinated, we believe borders will slowly open to countries with lower infection rates.

While Service Residence segment continued to receive variable rent, RevPAU weakened q-o-q (-4.7% q-o-q) in 4Q20 due to weaker occupancy (-4.5% points), based on our estimates.
Similar to the hotel business, Service Residence business was affected by demand from foreign workers as they switch to other housing alternatives. ADR was flat q-o-q and Far East Hospitality Trust hopes to maintain the rate at current levels in the near term. Despite border closures, we understand that there is still demand from corporates. Going forward, we expect Service Residence segment to see weaker demand as long-term guests switch to other alternatives.
As for its commercial segment, the retail business which forms two-thirds of its commercial segment should deliver stronger income in 2021F due to lower or no rental rebates.

We raise our Far East Hospitality Trust's FY21-23F DPU forecasts by ~2% as we update for FY20 numbers and increase commercial segment income.
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We believe that compared to its peers Far East Hospitality Trust has the most resilient income as its hospitality segment is backed by master leases and hence income from this segment would remain stable. Based only on its master lease income, Far East Hospitality Trust would provide 2 cents DPU (3.5% yield). Far East Hospitality Trust's share price is trading at -1x s.d. below mean.
Upside/downside risks are smaller/larger negative impact from COVID-19.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-11

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