RevPAR Set to Fall (again), Downgrade to HOLD

• We cut Far East Hospitality Trust (SGX:Q5T)'s DPUs by 12-20% following the weaker-than-expected 4Q19 results and as we see weaker income visibility for its Singapore-focused portfolio, despite downside being supported by its master leases. We see demand slowing amidst the Covid-19 epidemic. With weak DPU visibility, we downgrade to HOLD, and reduce our DDM based Target Price to SGD0.70 (COE 7.1%, LTG 2.0%).
• We prefer CDL Hospitality Trusts (SGX:J85) (BUY, Target Price SGD1.75) and Frasers Hospitality Trust (SGX:ACV) (BUY, Target Price SGD0.80) given their more diversified portfolios, and less demanding valuations.

Weaker-than-expected 4Q19, SRs Did Better

• Revenue was flat y-o-y while NPI dipped 1.0% y-o-y, with stable occupancies at both its hotels and serviced residences (SRs). RevPAR for its hotels fell 0.6% y-o-y on weaker corporate demand for the quarter while RevPAU for its SRs rose 1.9% y-o-y with growth in shorter-stay bookings at higher ADRs.
• Singapore’s initially busy 2020 event calendar has seen cancellations and postponements into 2H20, and near-term demand visibility remains weak. We factor in lower RevPAR at -12% (from +3-5%) with slower occupancies in 1H20.
• Its master leases generated 72% of its FY19 rental income according to management; the REIT’s assets could trade down to their minimum rents if demand declines by 25-30% as suggested by Singapore’s Tourism Board (STB).

Easing Supply, AEIs Cushion RevPAR Downside

• Further RevPAR downside should be cushioned to some extent by easing supply. Savills estimates new hotel rooms to slow to 1.0-1.2% pa in 2020- 21, from +5.1% pa between 2013-17.
• Far East Hospitality Trust has completed the AEI at Orchard Rendezvous after a rebranding effort and may bring forward AEIs at its older hotel assets (eg. Elizabeth Hotel) or redevelopment plans for the commercial properties within its portfolio, which aim to dovetail the government’s longer term CBD rejuvenation plans.

Shares Have Retreated, Not Yet Value Territory

• Far East Hospitality Trust's shares have pulled back alongside other hospitality and aviation sector related names, and now offer 5.3% FY20 dividend yield after our DPU cuts.
• Its relatively high 39.2% leverage suggests limited acquisition growth opportunities and upside to estimates, even though we are hopeful of a sector recovery in 2H20.

Source: Maybank Kim Eng Research - 14 Feb 2020