Far East Hospitality Trust - CGS-CIMB Research 2021-07-31: Income Protection From Master Leases

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Income Protection From Master Leases

Far East Hospitality Trust’s 1H21 distribution per unit increased ~7% due to lower expenses.
Hotel RevPAR improved but Serviced Residence’s RevPAU declined q-o-q.
However, income downside is limited due to master leases. Reiterate ADD.

Far East Hospitality Trust (SGX:Q5T)’s 1HFY21 revenue and NPI declined 6% and 6.2% y-o-y, respectively. While revenue from hotels remained flat y-o-y due to fixed rent support, serviced residence revenue declined 7.8% y-o-y to S$5.7m. Revenue from the commercial segment fell 23.2% y-o-y to S$7.4m.
Despite the weaker NPI, income available for distribution after retention increased 7.6% y-o-y to S$21.7m, thanks to lower finance expense (due to a combination of low short-term interest rates and lower fixed rates) and REIT manager’s fees.
Consequently, Far East Hospitality Trust's distribution per unit in 1HFY21 grew 6.8% to S$0.011, representing 44.1% of our full-year forecast. However, including the retained income of S$3.6m or S$0.0017, its 1HFY21 should have been S$0.0127 cents which is in line, at 50.9% of our FY21F DPU forecast.

Hotel RevPAR declined ~35.4% y-o-y to S$51 due to lower ADR (-35.3% y-o-y) on lower rates from government contracts and companies requiring accommodation for their workers. On a q-o-q basis, RevPAR increased 2% due to higher local corporate demand for their employees as COVID-19 cases surged at workplaces.
Six out of nine Far East Hospitality Trust hotels are under government contracts currently. The near-term intention is to keep all government contracts as borders remain closed.

Serviced residence (SR) RevPAU declined 16.9% y-o-y on weaker occupancy (-6.5% points to 76.2%) and average daily rate (-9.5% to S$181) due to weaker demand from companies requiring accommodation for their workers. Despite the decline in RevPAU y-o-y, the SR segment was supported by master lease rental which registered a smaller decline of 7.8% y-o-y in 1H21.
Overall, Far East Hospitality Trust’s SR continued to perform above fixed rent levels. We think the SR segment will continue to face downward ADR pressure due to a lack of long-stay corporate demand. It reported a weaker RevPAU of ~-3% q-o-q in 2Q21.
Meanwhile, occupancy for office (80% in 1H21) remained stable but retail occupancy (70% in 1H21) was weaker y-o-y. A change in the lease structure from fixed to turnover based and rental rebates led to weaker y-o-y revenue and NPI. Far East Hospitality Trust hopes to achieve 80% retail occupancy by year-end and it has set aside some income for rental rebates in 2H21F.

We maintain our FY21-23F DPU forecast for Far East Hospitality Trust.
We continue to like Far East Hospitality Trust for its strong master lease income support (~80% of 1H21) which enhances income stability and limits downside risks. Based only on its master lease income, Far East Hospitality Trust would provide S$0.02 DPU (3.4% yield).
See
Upside/downside risks are smaller/larger negative impact from the COVID-19 outbreak.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-31

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