FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Far East Hospitality Trust - On The Cusp Of Re-opening And Recovery
- Singapore is expected to re-open its international borders in a progressive and calibrated manner to fully vaccinated travellers starting in 4Q21. The recovery would initially be modest in 4Q21, driven mainly by corporate travellers, but will become more broad-based subsequently in 2H22.
- Far East Hospitality Trust (SGX:Q5T) is able to weather a bumpy recovery due to fixed rents from its master leases. It leads the S-REIT industry as it is ranked 2nd in transparency and 7th in governance. Maintain BUY. Target: S$0.71.
Requirements for stay-home notice (SHN) to be eased.
- 80% of Singapore’s population is expected to be fully vaccinated by September. Achieving the important milestone could pave the way for the multi-ministry taskforce to re-open Singapore’s international borders in a progressive and calibrated manner to fully vaccinated travellers without the need for them to serve the 14-day stay-home notice (SHN) at dedicated SHN facilities. This would be facilitated by establishing travel corridors with countries that have brought COVID-19 under control.
- First wave of re-opening to take place in 4Q21. Currently, fully vaccinated travellers from Brunei, New Zealand, China, Hong Kong, Macau and Taiwan are already allowed to apply to serve the 14-day SHN at their place of residence. Fully vaccinated travellers from Australia, Austria, Canada, Germany, Italy, Norway, South Korea and Switzerland are able to do likewise from 20 Aug 21.
- In the first wave of re-opening in 4Q21, it is envisaged that fully vaccinated travellers from these 12 low-risk countries would have to take a polymerase chain reaction (PCR) test at Changi Airport, self-isolate themselves for about a day while awaiting the test results, and then be allowed to travel freely within Singapore upon receiving a negative test result. The US and European countries are also likely to be included in this first wave of re-opening.
- Redeveloping Central Square. Far East Hospitality Trust (FEHT, which owns Central Square) 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 JV has received an outline advice from the Urban Redevelopment Authority (URA) for the redevelopment, which comprises serviced residences (30%) and commercial spaces (70%), including office and retail units. The JV is working on obtaining outline permission and subsequently planning permission for the proposed integrated development, which will rejuvenate the precinct and involves a potential rezoning and uplift in gross floor area (GFA).
- Deleveraging through divestment of Central Square. Central Square (Village Residence Clarke Quay) is valued at S$198m as of Dec 20. The capital unlocked would be utilised to repay borrowings. The divestment could lower aggregate leverage by an estimated 5ppt to 36.3%. Far East Hospitality Trust is expected to reap a meaningful divestment gain given the uplift in plot ratio, which could be distributed to unithholders over several quarters to smooth out DPU.
- Change in management fee structure meant to be permanent. REIT manager’s fees declined 23% in 2020 due to the change in 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”. The new management fee structure is already enshrined in Far East Hospitality Trust’s trust deed. Amendments to the trust deed to increase management fees require approval from unitholders, which is untenable.
- Leading the S-REITs industry in transparency and governance. In Aug 21, Far East Hospitality Trust was ranked 2nd out of 43 REITs and business trusts on the Singapore Governance and Transparency Index. In Oct 20, Far East Hospitality Trust was ranked 7th out of 45 REITs and business trusts on the Singapore Governance Index.
STOCK IMPACT
- Recovery to be set in motion in 4Q21. The recovery of the hospitality sector would initially be modest in 4Q21, driven mainly by corporate travellers. The industry might also benefit from pent-up demand from leisure travellers, especially those impressed by Singapore’s cohesive and organised response to contain the COVID-19 pandemic. The initial phases of the recovery are expected to be bumpy due to sporadic bouts of imported cases. The inertia and resistance to travelling would melt away and the recovery will become more broad-based in 2H22.
VALUATION/RECOMMENDATION
- We maintain our existing DPU forecast for Far East Hospitality Trust.
- Maintain BUY. Our target price of S$0.71 is based on the dividend discount model (cost of equity: 7.0%, terminal growth: 1.8%).
- See
SHARE PRICE CATALYST
- Downside protection from fixed rents embedded in master leases with sponsor FEO.
- Recovery in occupancy, ADR and RevPAR in 2022.
- 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/
2021-08-13
SGX Stock
Analyst Report
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