Far East Hospitality Trust - Maybank Kim Eng 2021-02-11: Master Lease Cushion

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Master Lease Cushion

Far East Hospitality Trust (SGX:Q5T)’s operations in 2H20 continued to be cushioned by isolation demand and accommodation originating from border restrictions.
Occupancies for its Singapore hotels and serviced residences (SRs) were high at 92.5% and 84.9%. RevPARs/ RevPAUs were soft but declined less than peers, while a reduction in management fees (by 23%) after a review at end-2019 saw FY20 DPU at -37% y-o-y (versus -60% y-o-y for Ascott Residence Trust (SGX:HMN) and -45% y-o-y for CDL Hospitality Trusts (SGX:J85)).
A high proportion of minimum fixed rent from Far East Hospitality Trust's master lease offers downside support amid a slow 2021 recovery. Far East Hospitality Trust's valuation is undemanding at 0.7x P/B to our S$0.70 DDM-based target price (COE: 5.4%, LTG: 2.0%).

Far East Hospitality Trust's hotel revenue fell 42% y-o-y and 18% q-o-q in 4Q20 and was down ~32% y-o-y to 65.4% of FY20 revenue, from 69.2% in FY19, supported by fixed rent from its master lease rental.
Despite improving occupancy, which rose to 85.1% for FY20 from 84.2% in 9M20 and 77.6% in 1H20, RevPAR fell 50% y-o-y to S$71 for FY20 (was S$75 in 9M20) on the back of lower ADRs, which fell 48% y-o-y to S$84 (from S$89 in 9M20).
Staycation demand (at 10- 50% for three hotels) has not been meaningful and Far East Hospitality Trust's management expects its government contracts to buoy occupancies, as they extend till at least mid-Mar 2021. We see better RevPAR visibility in 2H21.

Far East Hospitality Trust's 4Q20 serviced residence revenue was down ~8% y-o-y but rose 8% q-o-q and declined ~9% in FY20, outperforming its fixed rent. This was supported by long-stay corporate demand, which increased to 82.1% of revenue, from 69.5% in FY19, led by finance services.
RevPAU was lower at S$159 (from S$163 in 9M20) on the back of stable occupancy, at 83.8% for FY20 (vs. 84.2% in 9M20), and softer ADRs, which dipped to S$190 in FY20 (from S$193 in 9M20), with a cut-back in shorter-term stay bookings.
We expect a weaker 1H as occupancies dip due to increased competition, and as gains from the earlier growth at higher rates continue to ease off.

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Far East Hospitality Trust's AUM declined 5% y-o-y, as valuers price in a recovery from 2022, while cap rates were stable for its hotels (at 4.25-5.0%) and serviced residence (3.0-3.5%). As such, its leverage rose q-o-q from 39.5% to 40.9%, leaving S$200m debt headroom (at 45% limit).
Given soft demand fundamentals, we think Far East Hospitality Trust's management could prioritise redevelopment (at Village Residence Clarke Quay) ahead of acquisitions in the near term.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-02-11

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