FEHT's 1H21 in Line, Awaiting RevPAR Recovery

• Far East Hospitality Trust (SGX:Q5T)’s 1H21 DPU was up 6.8% y-o-y, but lower by ~1% h-o-h, excluding distribution top-ups in 2H20. Revenue and NPI both fell ~6% y-o-y but rose by ~7% h-o-h and ~8% h-o-h, as declines in RevPAR and RevPAU eased for its Singapore hotels and serviced residences (SR) portfolio.
• We see a better 2H, with its hotel occupancies cushioned by isolation demand in 3Q, while RevPAR should rise towards year-end. It remains our preferred play in a (slow) sector recovery, with the high proportion of minimum fixed rent from its master leases offering downside support amid soft RevPAR growth.
• Our DPU forecasts for Far East Hospitality Trust are unchanged.
• Far East Hospitality Trust's valuation is undemanding at 0.7x P/B and 27% upside to our S$0.70 DDM-based target price (COE: 5.4%, LTG: 2.0%).

Hotel Revenue Up H-o-h, Backed by Fixed Rent

• Hotel revenue was flat y-o-y but rose ~10% h-o-h, to ~69% of revenue in 1H21, supported by fixed rental from its master leases. Occupancy stayed at 77.6% in 1H21, from government isolation contracts, and demand for accommodation from firms housing their Malaysian workers, while RevPAR was weaker at S$51 (from S$79 for 1H20), as ADRs fell ~35% y-o-y to S$66 (from S$102).
• While we expect similar demand to buoy occupancy in 3Q21, rising vaccination rates and a resumption of travel arrangements in 4Q21 should lift RevPAR, and strengthen visibility in FY22.

Serviced Residences Cushioned by Resilient Long-stays

• Far East Hospitality Trust's Serviced Residences revenue fell by ~8% y-o-y and ~6% in 1H21, from – ~16% y-o-y and – ~2% h-o-h in 2H20. It continued to perform above its fixed rent, with support from long-stay corporate demand, which was at ~78% of revenue, led by the services (at ~20%), and banking and finance industries (~15%).
• RevPAU fell ~17% y-o-y to S$138 (from S$166) due to lower occupancy (82.7% to 76.2%) and ~10% y-o-y softer ADRs. We expect further long-stay demand in 2H21, which should pick-up towards end-2021.

Redevelopment Ahead of Acquisitions

• Far East Hospitality Trust's gearing was stable at 41.3% (from 41.6% as of end-Mar 2021), with a S$290m debt headroom (at 45% limit). We believe management could prioritise a redevelopment (at Village Residence Clarke Quay) ahead of acquisitions in the near term.
• Possible government plans, to rezone the asset and lift GFA, from a proposed integrated development, are currently being explored, with details expected by end-2021.

Source: Maybank Kim Eng Research - 1 Aug 2021