FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - Silver Linings Despite The Resurgence With New Variants
- The increase in infections due to the new variants of COVID-19 has resulted in increased demand from the government for SHN facilities and public hospitals for accommodation for healthcare workers. However, the recovery in tourism and inbound travellers is now postponed to 2H22.
- Far East Hospitality Trust is the most defensive hospitality REIT and is well positioned to weather a prolonged downturn due to downside protection from the high fixed rent component from its master leases. Maintain BUY. Target price: S$0.71.
WHAT’S NEW
- The unfortunate rise in new daily cases of COVID-19 infections has led to increased demand from the government and public hospitals.
More hotels to be deployed for government contracts.
- Far East Hospitality Trust (SGX:Q5T) currently deploys six hotels to serve as dedicated Stay-Home-Notice (SHN) facilities and government quarantine facilities (GQF). Since 7 May 21, travellers with recent travel history to higher-risk countries (Australia, New Zealand, Brunei, mainland China, Hong Kong, Macau and Taiwan are considered lower risk) are required to serve a lengthier 21-day SHN at dedicated SHN facilities, compared with the previous 14-day SHN. Thus, the government has to build up its capacity of SHN facilities.
- Far East Hospitality Trust plans to deploy one more hotel as a dedicated SHN facility, making it a total of seven hotels under government contracts.
Increased demand to provide accommodation for healthcare workers.
- Public hospitals have bulk-booked hotel rooms to provide accommodation for their healthcare workers. Many healthcare workers prefer to stay at hotels as a precautionary measure to ensure they do not unwittingly infect their children and vulnerable parents with COVID-19. Some healthcare workers also prefer to segregate themselves during this period of heightened alert. Demand from public hospitals has increased after a new cluster surfaced at Tan Tock Seng Hospital. Thus, occupancies have improved from 30-40% to 50-60% for the three hotels deployed for corporate contracts and staycation.
Serviced Residences to weather fluctuation in demand.
- The Ministry of Manpower has stopped accepting entry applications for work pass holders from higher risk countries, except for workers needed for strategic and infrastructural projects. Demand from project groups remains stable. However, corporate bookings for temporary lodging for foreign employees are affected (temporary lodging for new foreign hires while they search for suitable permanent accommodation). We expect a slight easing of occupancy for Serviced Residences from 75% in 1Q21 to 70% in 2Q21.
Redeveloping Central Square.
- Far East Hospitality Trust has received an outline advice from the Urban Redevelopment Authority (URA) for the redevelopment of Central Square, which comprises a serviced residence and commercial spaces, including office and retail units. Far East Hospitality Trust and City Developments (SGX:C09) (owner of the adjacent Central Mall) have jointly submitted a proposal to redevelop Central Square and Central Mall under the strategic development incentive scheme. The proposed integrated development will rejuvenate the precinct and involves a potential rezoning and uplift in gross floor area (GFA).
An opportunity to create value through capital re-cycling.
- Management will evaluate opportunities to divest Central Square given the substantial disruption to income contribution from the property during the redevelopment. Potential buyers include Far East Organisation and City Developments, who could take over the entire redevelopment project. The divestment, if it materialises, will help Far East Hospitality Trust reap potential divestment gain and deleverage as well.
STOCK IMPACT
Breaking the chain of transmission through rigorous contact tracing.
- New cases of COVID-19 infections have climbed due to new clusters at Tan Tock Seng Hospital and Changi Airport. The government has stepped up contact tracing, testing and quarantine protocol. Singapore is on heightened alert due to the increase in community transmissions. In particular, new strains of the coronavirus are proving to be more transmissible and harder to detect.
Recovery postponed to 2H22.
- While we are hopeful that community transmission should come under control, the more stringent border restrictions are likely to be maintained to minimise risk of new variants of COVID-19 leaking to the local community. Unfortunately, the reopening of Singapore’s international borders through air bubbles and travel corridor has been delayed. Thus, we expect the recovery in tourism and inbound travellers to be postponed to 2H22.
Downside protection from high fixed rent component.
- Far East Hospitality Trust is the most defensive hospitality REITs. All Far East Hospitality Trust's hotels and serviced residences are under master lease agreements with subsidiaries 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 (pre-COVID-19). These master leases run till 2032.
EARNINGS REVISION/RISK
- We have trimmed our 2021 and 2022 DPU forecasts for Far East Hospitality Trust by 2% and 15% respectively due to the delay in recovery till 2H22. Our 2023 DPU forecast remains unchanged. The impact on our 2021 DPU forecast is marginal as we had previously expected hotels to provide only fixed rents in 2021.
VALUATION/RECOMMENDATION
- Maintain BUY on Far East Hospitality Trust. Our target price of S$0.71 is based on the dividend discount model (cost of equity: 7.0%, terminal growth: 1.8%).
- We expect distribution yield to recover to 5.5% in 2022 and 6.7% in 2023. Far East Hospitality Trust trades at 0.74x 2021F P/B, representing a steep 26% discount against NAV/share of S$0.79. We believe the deep discount is unwarranted, given good corporate governance and creditworthiness of sponsor FEO.
- See
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 2H22.
- Acquiring the remaining 70% stake of three Sentosa hotels from sponsor FEO.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-05-27
SGX Stock
Analyst Report
0.71
DOWN
0.720
