Analysts from Citi Research and Maybank Securities have maintained their “buy” calls for Far East Hospitality Trust (FEHT) Q5T with unchanged target prices of 70 cents and 80 cents respectively.
Citi analyst Brandon Lee says that he expects a “strong recovery” for FEHT, with the rebound of its key drivers in 1QFY2023 ended March 31 painting a positive outlook for the REIT despite higher interest rates.
He says that FEHT’s 1QFY2023 business update showed a continued recovery in Singapore's hospitality sector, with hotel and serviced residences revenue per available room (RevPAR) improving 129% and 28% y-o-y, and forming 95% and 123% of pre-Covid levels in FY2019, driven by robust demand from leisure travellers.
According to him, visitor arrivals to Singapore are expected to improve further in FY2023 with the number hitting 2.9 million in 1Q2023, almost two thirds of 2019 and on track to reach the full year target of 12 to 14 million visitors, compared to just 6.3 million in 2022.
For the period, the REIT’s hotels saw average occupancy grow 14 percentage points y-o-y to 81.9%, while average daily rates (ADR) increased 89% to $165 on strong demand, further supported by the newly-rebranded Vibe Hotel Singapore Orchard and higher rates from remaining government contracts.
Maybank’s Krishna Guha says the improvement in RevPAR was led by record room rates and a pick up in occupancy, only partially offset by higher borrowing costs, which could lead to a growth in distributions.
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“FEHT is poised to benefit from recovering visitor arrivals which should lead to an estimated 30% y-o-y growth in distributions for the year,” says Guha.
FEHT’s income available for distribution increased 24% y-o-y to $18.2 million, forming 24.3% of Guha’s full-year estimate but beating Lee’s expectations by making up 28% of his FY2023 forecast.
For 1QFY2023, FEHT’s revenue increased 20% y-o-y and 18% q-o-q to $25.2 million, with net property income (NPI) up by a strong 24% and 18% to $23.7 million on higher contributions from hotels and commercial properties.
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This was mitigated by serviced residences that slipped 8% y-o-y, but still up 10% q-o-q, to $2.7 million due to Central Square’s divestment completion in March 2022. Excluding the divestment of Central Square, serviced residences revenue would have grown 27% y-o-y, says Lee.
Meanwhile, its gearing of 32% implies a debt headroom of some $308 million before it would 40%. This is accompanied by a higher interest rate of 3.2% and a significantly lower fixed-rate debt proportion of 47.3%, which ranks as the lowest among S-REITs under Citi’s coverage, which could exert upside and downside risks to debt cost and interest coverage ratio (ICR), says Lee.
“While current interest and cap rates make deals difficult, opportunities exist from sponsor’s pipeline and third-party assets in geographies with a good spread,” adds Guha.
He has raised his FY2023 distribution per unit (DPU) estimates by 1% while lowering his FY2024 DPU forecast by 3% with a higher top line offset by higher borrowing cost and units on issue to account for fee-related issuance of management units. “Our new forecasts imply 32% DPU growth for FY2023 and a dividend yield of 6%, which we view favourably,” says the Maybank analyst.
Although FEHT has underperformed S-REITs by some 2% year-to-date (ytd), Lee says more properties in its portfolio are expected to perform above fixed rents and achieve variable rents.
Lee’s target price for FEHT of 70 cents is based on an average of dividend discount model (DDM) and revalued net asset value (RNAV) valuations.
As at 11.46am, units in FEHT were trading 0.5 cents or 0.80% down at 62 cents.
