FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - 1H21 Defensive Anchor To Weather The Delta Variant Headwind
- Far East Hospitality Trust reported DPU growth of 6.8% y-o-y despite Phase 2 (Heightened Alert). The resurgence of COVID-19 due to the Delta variant poses near-term headwinds. Far East Hospitality Trust is most defensive and best able to weather the turbulence due to its master leases with sponsor Far East Organisation (FEO) which run till 2032, and accounted for 81% of gross revenue from its hotels and serviced residences pre-COVID-19.
- Far East Hospitality Trust trades at P/NAV of 0.7x. Distribution yield will improve to 4.9% in 2022 and 6.8% in 2023. Maintain BUY. Target price: S$0.71.
Far East Hospitality Trust (FEHT)'s 1H21 Results
- Far East Hospitality Trust (FEHT, SGX:Q5T) reported DPU of S$0.0110 for 1H21 (up 6.8% y-o-y), which was in line with our expectations. The distributable amount retained for potential required assistance to retail tenants was S$3.6m for 1H21 and S$5.5m for 1H20. Excluding income retained, distributable income would have declined 3% y-o-y.
- Far East Hospitality Trust intends to maintain its policy of distributing at least 90% of the taxable income for the full financial year (income retained in 1H20 was released in 2H20).
Hotels: Cushioned by stability of fixed rents.
- Revenue from hotels was unchanged at S$14.3m with downside protection from its fixed rents. Occupancy for hotels improved 3ppt q-o-q to 79.1%, while average daily rate (ADR) was stable at S$66 in 2Q21. Seven out of Far East Hospitality Trust's 9 hotels were deployed for government contracts for isolation purposes. These contracts are likely to be extended for another two months till mid-October. Its hotels also secured corporate contracts for accommodation for foreign workers and healthcare workers. RevPAR for the hotel portfolio increased 4% q-o-q to S$52 in 2Q21.
Serviced residences: Resiliency from long-term contracts.
- Occupancy for Far East Hospitality Trust's serviced residences (SR) improved 3ppt q-o-q to 77.7% in 2Q21 due to support from long-stay corporate customers. ADR eased 6% q-o-q to S$175 due to lower rates from some corporate contracts (foreign workers seeking cheaper lodging options). RevPAR eased slightly by 3% q-o-q to S$136. Its SRs contributed both fixed rents and variable rents.
Pressure on commercial premises.
- Revenue from commercial premises dropped 20.8% y-o-y in 1H21 due to a decline in demand for such ancillary spaces located in its hotels and serviced residences. Retail leases were restructured with a greater emphasis on variable rents as a percentage of gross turnover. It provided rental rebate of 0.5 months for retail tenants due to Phase 2 (Heightened Alert).
Sponsor aligns with unitholders’ interest.
- REIT manager’s fees declined 3.9% in 1H21. Far East Hospitality Trust had changed the management fee structure in 2020. Base fee was reduced from 0.3% to 0.28% of deposited property with effect from 1 Jan 20.
Steep fall in interest expense.
- Interest expenses declined 16.9% y-o-y in 1H21 due to lower short-term interest rates. The average cost of debts has improved by 0.6ppt y-o-y to 2.1%. Discussion with lenders on refinancing term loans of S$100m due in Dec 21 are ongoing and should be completed in 2H21. The aggregate leverage improved slightly by 0.3ppt q-o-q to 41.3%.
STOCK IMPACT
Delta variant creates uncertainties.
- The spread of the Delta variant has put a dampener on the recovery of the hospitality industry. The Delta variant is 2-3x more transmissible and has hit countries that previously managed to keep COVID-19 at bay.
- Near-term business will be supported by government and long-stay corporate contracts as Singapore’s international borders remaining largely closed.
Silver lining as vaccination rates continue to rise globally.
- In Singapore, 58.3% of the population are already fully vaccinated against COVID-19 and another 17.1% have received the first dose as of end-July. 80% of Singapore’s population is expected to be fully vaccinated by September. The multi-ministry taskforce will consider a gradual re-opening by allowing fully vaccinated people to travel without serving a 14-day stay home notice (SHN). This would be facilitated by establishing travel corridors with countries that have kept COVID-19 under control.
Downside protection from high fixed rent component.
- Far East Hospitality Trust is the most defensive hospitality REIT. All of 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 totals 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 fixed rents formed about 81% of gross revenue for 1H21. These 20-year master leases run till 2032.
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 (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).
EARNINGS REVISION
- We cut our 2021 and 2022 DPU forecasts for Far East Hospitality Trust by 4% and 11% respectively as the spread of the Delta variant dampens the recovery in 2H21 and 1H22. Our 2023 DPU forecast remains unchanged.
VALUATION & RECOMMENDATION
- Maintain BUY on Far East Hospitality Trust. Our target price of S$0.71 is based on DDM (cost of equity: 7.0%, terminal growth: 1.8%).
- See
SHARE PRICE CATALYST
- Downside protection from fixed rents embedded in master leases with sponsor Far East Organisation (FEO), which owns 61% of Far East Hospitality Trust.
- Recovery in occupancy, ADR and RevPAR in 2023.
- 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/
2021-08-02
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