• COVID-19 spread intensified
• SRs and commercial portfolio could provide a buffer
• Lower FV estimate of S$0.52

COVID-19 Was Declared a Pandemic

COVID-19 is spreading rapidly across the globe. As of 13 Mar, COVID-19 has spread to over 120 countries with more than 140,000 reported cases. More countries announced travel bans on visitors from coronavirus hotspots and advised people to defer all non-essential travel overseas. At a media briefing, WHO declared COVID-19 a pandemic and called all countries to take comprehensive measures to combat the virus.

Larger Impact on Hotels Than on SRs

From our channel checks, the hotel industry’s occupancy rate in Singapore has dropped to ~30% in MTD March vs. February’s occupancy rate of ~40%. We understand that FEHT’s performance was slightly better than the industry average with higher hotel occupancy rate of mid-30s for MTD March and ~50% in Feb. Serviced residences (SRs) performed better than hotels due to its long term nature of stays and focus on corporate travel. Occupancy rate of SRs was ~80% for Feb vs. ~70% in MTD March.

In terms of forward bookings, April’s bookings was ~13% YoY lower while May’s booking was flat as compared to the same period last year. FEHT is seeing more “last minute bookings” with bookings coming in 1 or 2 weeks in advance as travellers are taking a wait-and-see approach. However, with the uncertainty ahead, we could potentially see more cancellations should the situation further escalate e.g. wide community outbreak in Singapore and stricter travel restrictions.

Higher risk of gross revenue declining to its minimum rent

The situation looks more severe as compared to SARS with much higher infection rate and death tolls. Prime Minister Lee remarked that COVID-19 could “continue for some time – a year, and maybe longer”. Singapore Tourism Board (STB) estimated that the fall in tourist arrivals to Singapore could be 25-30% in 2020.

Given FEHT’s pure Singapore focused portfolio, we now see higher risk of FEHT’s gross revenue declining to its minimum rent in its master leases with an estimated 21% fall in DPU YoY for FY20. However, FEHT’s fixed rent component which formed about 72% of the master lease rental in FY19, and its commercial segment i.e. office and retail (19% of FY19 gross revenue) could provide some buffer and downside protection.

In light of the rapidly evolving situation, we adjust our DPU forecasts for FY20/21F down by 16%/3%, and increase from COE from 7.3% to 8.6%, while decreasing our risk-free rate from 2.0% to 1.55%. After adjustments, our fair value estimate decreases from S$0.65 to S$0.52.

Source: OCBC Research - 16 Mar 2020