Far East Hospitality Trust - UOB Kay Hian 2022-04-29: 1Q22 Preparing To Welcome The Return Of Business & Leisure Travellers


Far East Hospitality Trust - 1Q22 Preparing To Welcome The Return Of Business & Leisure Travellers

  • Outlook has improved with the rapid reopening of international borders in Apr 22. Three hotels under government contracts were redeployed to serve business and leisure travellers in 1Q22 while serviced residences benefitted from the sustained increase in long-stay corporate and project groups.
  • We forecast that Far East Hospitality Trust’s distribution yield will improve to 5.7% in 2023. Far East Hospitality Trust trades at P/NAV of 0.80x. Maintain BUY. Target price: S$0.82.

Far East Hospitality Trust's 1Q22 Results

  • Far East Hospitality Trust (SGX:Q5T) reported distributable income of S$14.7m for 1Q22 (up 17.2% y-o-y), which was in line with our expectations.
  • Hotels: Stability from fixed rents. Revenue from hotels was unchanged at S$14.3m with downside protection from its fixed rents. Occupancy for hotels dropped 8.4ppt y-o-y to 67.7% in 1Q22 (74% if we exclude Elizabeth Hotel) due to the cessation of government contracts for isolation purposes for three hotels (Village Hotel Albert Court, Quincy Hotel and Elizabeth Hotel). Rooms from these three hotels were put back to the market in Dec 21.
  • Currently, Far East Hospitality Trust has only three out of its nine hotels on government contracts. The remaining three government contracts were extended by 2-3 months till mid-22. Average daily rate (ADR) increased 31.8% y-o-y to S$87 due to the switch towards business and leisure travellers. RevPAR for the hotels increased 15.7% y-o-y to S$59.
  • Serviced residences: Resiliency from long-stay contracts. Serviced residences contributed both fixed rents and variable rents. Occupancy improved 11.9ppt y-o-y to 86.6% and ADR increased 7.5% y-o-y to S$201 in 1Q22 due to an increase in long-stay corporate and project groups. RevPAR expanded 24.3% y-o-y to S$174.
  • Steep fall in interest expenses. Interest expenses declined 23% y-o-y in 1Q22. The average cost of debts improved by 0.2ppt q-o-q to 1.7%. Management estimated that every 25bp increase in interest rates reduces Far East Hospitality Trust’s DPU by 1%.
  • The proportion of borrowings hedged to fixed interest rates have expanded from 53% to 68% after repaying a term loan of S$238.6m using proceeds from the divestment of Central Square in Mar 22. Aggregate leverage has dropped 4.9ppt q-o-q to 33.4%.

Air travel getting back to normal again.

  • Vaccinated Travel Framework has replaced the existing Vaccinated Travel Lane scheme since 1 Apr 22. Fully-vaccinated travellers and children aged 12 and below who have taken the COVID-19 test two days before departure were allowed to enter Singapore. They no longer have to take an antigen rapid test (ART) within 24 hours of arrival. Travellers are no longer restricted to take only designated flights to enter Singapore quarantine-free. The quota on the number of daily arrivals was abolished. Subsequently, the requirement for pre-departure COVID-19 tests was also abolished starting 26 Apr 22.
  • Benefitting from pent-up demand to travel. Singapore’s border has fully reopened to vaccinated travellers with the rapid easing of travel restrictions in Apr 22. Business travellers are returning in droves, followed by leisure travel by individuals and tour groups. 2Q22 is a transition quarter as an increase in business and leisure travellers offset the drop off in corporate contracts for accommodation of foreign workers. The recovery is expected to be more pronounced in 2H22. International Air Transport Association (IATA) expects air passenger traffic in the Asia Pacific region to reach 68% of pre-pandemic levels in 2022, 84% in 2023 and 97% in 2024.
  • Preparing to welcome travellers with new brands and new services. The Elizabeth Hotel is undergoing upgrading of reception, common areas and guestrooms and will reopen in phases in 3Q22. Far East Hospitality Trust will be launching a new brand with a new approach in service offering. Regency House is undergoing refurbishment of the lobby and reception areas with expected completion in 3Q22.

Deleveraged and well positioned for future expansion.

  • Far East Hospitality Trust has entered into a put-and-call option agreement and has completed the divestment of Central Square for S$313.2m on 24 Mar 22. Exit yield is attractive at 1.8%. The estimated divestment gain is S$112.4m- 130.4m. There is an additional incentive fee of S$18m if certain conditions are fulfilled by Dec 23.
  • Assuming 84% of the divestment proceeds is utilised to repay outstanding borrowings, aggregate leverage is expected fall from 41.3 to 33.4%. Debt headroom increased to S$539.9m based on aggregate leverage limit of 45%. Far East Hospitality Trust will consider distributing a portion of the divestment proceeds of S$50.4m (2.6 cents per unit) to unitholders.

Downside protection from high fixed rent component.

  • Far East Hospitality Trust is the most defensive hospitality REIT. All Far East Hospitality Trust 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 fixed rents formed 98% of total gross revenue in 2021. These 20-year master leases run till 2032.

Far East Hospitality Trust - Earnings forecast revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 0.82 UP 0.760