FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - 2H20 The Best Offence Is A Great Defence
- Occupancies for hotels and serviced residences (SRs) dipped by 9.9ppt and 4.4ppt q-o-q respectively in 4Q20 due to lower demand for accommodation for Malaysian workers displaced by the MCO. However, Far East Hospitality Trust’s distributable income is more stable due to its master leases with sponsor FEO, which run till 2032.
- Fixed rents accounted for 72% of rental income from Far East Hospitality Trust's hotels and serviced residences pre-COVID-19.
- Far East Hospitality Trust trades at P/NAV of 0.74x. Distribution yield is set to improve to 6.4% in 2022.
- Maintain BUY. Target price: S$0.72.
Far East Hospitality Trust's 2H20 Results
- Far East Hospitality Trust (SGX:Q5T) reported DPU of 1.38 cents (-30.7% y-o-y) for 2H20, which is slightly below our expectations. It released S$5.3m from distributable income of S$5.5m retained in 1H20 during 2H20.
Hotels: Contributing only fixed rents.
- Occupancy for its hotels dipped 9.6ppt q-o-q to 87.7% in 4Q20. Demand for accommodation for Malaysian workers displaced by Malaysia’s Movement Control Order (MCO) has declined, as some Malaysian workers have started to rent rooms at HDB estates. However, the Average Daily Rate (ADR) was stable at S$69. Overall, RevPAR dropped by 57.1% y-o-y and 9.9% q-o-q to S$61. Hotels provided only fixed rents in 2H20.
- Corporate customers accounted for the lion’s share of 63% of hotel revenue for 2020 (4Q19: 32.7%). Southeast Asia hotel revenue also expanded to 53.7% (4Q19: 27.3%).
Serviced residences: Resiliency from long-term contracts.
- Occupancy for its serviced residences declined by a smaller 4.4ppt q-o-q to 82.7% in 4Q20 mitigated by more long-stay corporate customers. However, ADR decreased 17.1% y-o-y to S$180 due to lack of transient travellers, who provide shorter-stay bookings at higher room rates.
- Corporate customers accounted for 82.1% of serviced residences revenue (4Q19: 69.5%). RevPAR eased by 18.1% y-o-y and 5.1% q-o-q to S$149. Serviced residences provided fixed and variable rents in 2H20.
Sponsor aligns with unitholders’ interest.
- Far East Hospitality Trust's REIT manager’s fees declined 25.4% y-o-y in 2H20 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. Performance fee was changed from 4% of NPI to “4% of NPI or 4% of distributable income, whichever is lower”.
Steep reduction in finance expense.
- Finance expenses declined 23.1% y-o-y in 2H20 due to lower short-term interest rates. The average cost of debt has improved by 0.5ppt y-o-y to 2.4%. Far East Hospitality Trust has received commitment to refinance term loan of S$125m due in Mar 21. Another term loan of S$100m is due in 2H21 and negotiations with lenders are underway.
- Valuations of Far East Hospitality Trust’s investment properties dropped by 4.4% or S$121.2m. Thus, aggregate leverage has increased by 1.7ppt y-o-y to 40.9%. NAV/unit is S$0.79.
STOCK IMPACT
Air travel at a standstill.
- Near-term business is expected to be supported by government and long-stay corporate contracts. International borders remain closed with the bulk of new cases in Singapore being imported ones. Timing of recovery is contingent on development of effective COVID-19 vaccines and accurate rapid antigen tests.
- We expect recovery and the return to normalcy to take place in 2022. 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 (pre-COVID-19). The serviced residences segment with a larger base of long-term contracts also provides resiliency.
Gradual resumption of MICE activities.
- The Singapore Tourism Board has started accepting applications for meetings, incentives, conventions & exhibitions (MICE) events of up to 250 attendees from 1 Oct 20 (the number was capped at 50 since Jul 20). The recovery in MICE events is currently restricted to local corporate events and consumer shows.
WEF paves the way for more MICE activities.
- The World Economic Forum (WEF) special annual meeting will be held in Singapore instead of Davos Switzerland in Aug 21 due to the severe COVID-19 outbreak in Europe. The Singapore government has given an assurance that the event will be held in a safe and secure manner, so as to give confidence to all the participants, including Singaporeans will interact with the foreign delegates. Precautionary measures include on-arrival tests, pre-event and periodic antigen testing, as well as contact tracing. Staff and workers involved in the event will be vaccinated. The event will give a boost to MICE activities and the hospitality industry in Singapore.
EARNINGS REVISION/RISK
- We trimmed our Far East Hospitality Trust's 2021 DPU forecast by 8% as we expected recovery in inbound travel to be pushed out from mid-2021 to 4Q21.
VALUATION/RECOMMENDATION
Support from creditworthy sponsor.
- Sponsor FEO honours its obligations in the master leases, which expire in 2032. The sponsor has also demonstrated its alignment to unitholders’ interest by charging lower management fees.
Maintain BUY.
- Our target price of S$0.72 for Far East Hospitality Trust is based on the dividend discount model (COE: 7.0%, terminal growth: 1.8%).
- 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.
SHARE PRICE CATALYST
- 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 2022.
- Acquiring the remaining 70% stake in three Sentosa hotels from sponsor FEO.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-02-16
SGX Stock
Analyst Report
0.72
DOWN
0.740
