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Analysts divided on Far East Hospitality Trust following uncertainty over hospitality sector

Amala Balakrishner
Amala Balakrishner • 4 min read
Analysts divided on Far East Hospitality Trust following uncertainty over hospitality sector
Analysts appear mixed on Far East Hospitality Trust (FEHT), following its performance for 1H2020 ended June.
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Analysts appear mixed on Far East Hospitality Trust (FEHT), following its performance for 1H2020 ended June.

The trust’s distribution per unit (DPU) fell 43.4% to 1.03 cents in 1H2020, from the 1.82 cents disbursed in the year earlier.

Distributable income correspondingly fell 26.5% y-o-y to $25.7 million. This follows a 20.6% dip in gross revenue to $44.3 million. The Trust attributes this to a decline in the average occupancy in the hotels in FEHT’s portfolio during the pandemic.

The relatively high fixed rent component of the master lease mitigated the extent of the decline.

See: Far East Hospitality Trust declares 43.4% decline in 1H20 DPS to 1.03 cents

To this end, FEHT’s 1H20 average occupancy stood at 77.6% for hotels and 82.7% for serviced residences. Revenue per available room (RevPAR) for hotels dipped 42.9% y-o-y to $79 and 4.7% or $166 for serviced residences.

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Average occupancy of the trust’s hotels picked up when companies sought lodging there for their Malaysian employees there when Malaysia instituted the movement control order (MCO). It got another lift when returning Singaporeans and long-term pass holders were housed for isolation.

CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee say the trust’s 1H20 DPU is “in line with expectations”.

In particularly, they note the serviced residence performed relatively well, “thanks to long leases from corporates”.

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“While we estimate that occupancy remained relatively stable in 2Q vs. 1Q, the rates were lower quarter-on-quarter as FEHT secured longer-term business which usually commands lower rates,” the duo observe.

“We understand that the demand came from stay extensions, a switch from hotel to serviced residences as well as housing of Malaysian workers. While we note that >50% of its guests are on long-term basis (>1 month), a prolonged border closure may eventually affect the occupancy of serviced residences”.

FEHT’s portfolio comprises 13 properties – nine hotels and four serviced apartments – located in the core central regions of the Orchard Road Shopping Belt, Marina Bay Sands, Singapore River and Civic and Cultural Districts.

Collectively, these 3,143 units gives the trust a net asset value of $2.65 billion.

DBS analyst Derek Tan estimates that commercial rents typically contribute 20% of gross revenue on an annual basis, with an approximate split of 1:2 for office and retail earnings. So far, he says rental relief for about 1-2 months has been extended to tenants within the retail and office spaces respectively.

At present, Tan notes that the average occupancy of FEHT’s commercial tenants stands at 90%. “The office leases held up well in 1H20 with a relatively high tenant retention rate. Some of the existing retail leases have been restructured to include a higher percentage of GTO rents to tide tenants through periods of low demand,” he adds in a July 30 note.

Looking ahead, Tan believes FEHT’s master leases – entities and affiliates of its Sponsor Far East Organisation – will tide it through the current bleak outlook.

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Meanwhile, he anticipates a rebound in the trust’s staycation business as bookings for stay-home-notices taper off towards the end of 3Q20.

Come September, he says there may well be higher demand for staycations at FEHT’s hotels, particularly The Barracks Hotel in Sentosa “that is uniquely positioned”.

To this end, Tan as well as CGS-CIMB’s Eing and Lock are posting “buy” or “add” calls on the counter at a target price of 60 cents and 95.7 cents respectively.

At 60 cents, Tan believes the counter will have a 21% upside from its 49.5 cent closing on July 29. Meanwhile, the CGS-CIMB’s new price target is down 19.3 cents from their previous $1.15 call and is believed to give the counter a 72.5% upside.

The OCBC Investment Research team are of a different opinion. Citing a weaker than expected rebound in Singapore’s hospitality sector and soft corporate demand for serviced residences, the team are posting a “hold” call on FEHT at 51 cents.

Units of FEHT closed flat at 49 cents on August 3.

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