Analysts are remaining positive on Far East Hospitality Trust’s (FEHT) Q5T prospects after the hospitality REIT reported a 24.3% y-o-y increase in its distribution per stapled security (DPS) for the FY2022 ended Dec 31, 2022.
“FEHT owns the only pure-play Singapore hospitality portfolio within the Singapore REIT (S-REIT) sector and is to see a golden year ahead with Singapore revenue per available room (RevPAR) maintaining its record high since mid-2022,” say DBS Group Research analysts Geraldine Wong and Derek Tan.
The analysts have kept their “buy” call with a higher target price of 74 cents from 70 cents previously. FEHT’s full-year DPS stood in line with their estimates.
“We tweaked our interest rate assumptions for FY2023/FY2024 to reflect management’s guidance of a 3.5% average interest rate. Our weighted average cost of capital (WACC) assumption was revised to reflect lower debt financing with gearing reduced to 32.0% (post debt repayment following the Central Square divestment),” they write.
In their report, Wong and Tan expect Singapore’s hospitality scene to see a “robust” 2023 with tourist arrivals estimated at around 67% of normalised levels within the year. “[This is] potentially back loaded through the return of our largest inbound market, China, which made up [around] 20% of total arrivals in 2019,” the analysts note.
FEHT will also be a key beneficiary from the stronger demand in corporate rooms and a longer length of stay.
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“Variable rents have been unlocked at three assets in FY2022, with more assets to jump on the bandwagon in FY2023, should optimism in 2HFY2022 be extrapolated for a full year,” say Wong and Tan.
“Moreover, the timely completion of asset enhancement initiatives and rebranding of older assets this year will see these assets reap benefits through the capture of market share. This includes the rebranding of The Elizabeth Hotel to Vibe Hotel Orchard, with 64% higher RevPAR. The rebranding and new brands introduced along the Orchard Road belt, including Hilton Singapore and Pullman Orchard, will likely uplift room rates within the Orchard Road cluster, stabilising it to above 2019 benchmark rates, which would benefit FEHT’s hotels,” they add.
Wong and Tan also see the recycling of FEHT’s divestment proceeds as “naturally accretive” to the trust. “The recycling of divestment proceeds will be naturally accretive to FEHT as divestment proceeds from Central Square – at an exit yield of 1.8% – get recycled, potentially overseas,” they say.
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“Moreover, FEHT has committed to share capital gains from the divestment over a period of three years (or [around] 0.4 cents/share capital gain/year), to partially shelter against the impact of higher interest rates,” they add.
“With this, FEHT will be on track to hit [its] pre-pandemic DPS of 4.0 cents by FY2024,” the analysts estimate, adding that a full DPS recovery will drive FEHT’s share price higher.
They have lowered their FY2023/FY2024 DPS estimate to 3.58 cents and 4.0 cents from 3.87 cents and 4.41 cents previously. The new estimates imply a forward yield of 4.7% and 5.3%.
A key risk to their view is the possible anticipation by the market of acquisitions following the divestment of Central Square, which is not priced into their estimates.
Chinese tourists and leisure demand seen to drive FY2023 recovery: CGS-CIMB
CGS-CIMB Research has also kept its “add” call with a higher target price of 79 cents from 73 cents before.
This is as FEHT’s full-year DPS surpassed expectations at 105.9% of CGS-CIMB’s FY2022 estimates.
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Analysts Lock Mun Yee and Natalie Ong see the trust as benefitting from the return of Chinese tourists and leisure demand, adding that these two factors will drive the trust’s recovery in FY2032.
“Singapore Tourism Board (STB) projects that international visitor arrivals could double to 12 million – 16 million in 2023, supporting hospitality recovery,” they write.
However, the analysts have lowered their DPS estimates for the FY2023 to FY2024 by 8.4% to 8.8% as they lower their revenue assumptions and factor in higher borrowing costs.
“Re-rating catalysts include accretive acquisitions/divestments and faster recovery from impact of Covid-19. Downside risks are lower-than-forecast leisure/corporate travel demand and reimposition of lockdowns,” they write.
Recovery momentum continues for FEHT: UOBKH
UOB Kay Hian analyst Jonathan Koh is keeping his "buy" call with an unchanged target price of 71 cents as he sees the recovery momentum continuing for FEHT in the 2HFY2022.
The REIT's DPS for the 2HFY2022 came marginally above Koh's expectations.
"The reopening of Singapore’s borders since April 2022 generated a 92% y-o-y recovery in hotel RevPAR to $129 in 4QFY2022 as room rates increased," he writes.
"FEHT will benefit from a full-year impact of the reopening as well as the return of Chinese tourists in 2023. Its balance sheet is resilient with low aggregate leverage of 32%. [FEHT's] net asset value (NAV) per unit has increased 8% to 90 cents due to revaluation gains," he adds, noting that FEHT provides an FY2023 distribution yield of 5.6%. At its current unit price levels, FEHT trades at a steep 26% discount to NAV, he points out.
As at 12.59pm, units in FEHT are trading 0.5 cent lower or 0.75% down at 66.5 cents.
