Analysts from five brokerages have all given “buy” or “add” calls to Far East Hospitality Trust, with CGS-CIMB Research, Maybank Securities and UOB Kay Hian raising their target prices.
CGS-CIMB has raised its target price from 75 cents to 78 cents, while Maybank upped has upped its target price from 70 cents to 80 cents. UOB Kay Hian has raised its target price from 76 cents to 82 cents.
DBS Group Research has kept its target price unchanged at 78 cents, while Citi Research has given the trust a target price of 70 cents.
This comes after the REIT reported a distributable income of $14.7 million for the 1QFY2022 ended March, 17.2% higher y-o-y.
Gross revenue fell 1.6% y-o-y to $21 million mainly due to the 9.6% y-o-y decline in revenue for commercial premises at $3.8 million.
FEHT’s revenue for its hotels segment stood flat y-o-y at $14.3 million, while revenue for its serviced residences segment improved by 2.4% y-o-y to $3 million.
The lower revenue from its commercial premises segment was due to the divestment of Central Square in March, which resulted in the early termination and non-renewal of leases.
Improving operations: CGS-CIMB
To CGS-CIMB Lock Mun Yee, FEHT’s revenue and NPI stood in line with her FY2022 forecasts.
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The REIT’s income available for distribution stood slightly ahead at 28% of her FY2022 forecasts thanks to the lower interest expense after the completion of the divestment of Village Residences Clarke Quay (VRCQ).
In her report dated April 28, Lock notes that FEHT’s increases in hotel revenue per available room (RevPAR) were offset by lower occupancy rate following the cessation of government contracts for isolation purposes at three of FEHT’s hotels late last year.
RevPAR increased 15.7% yoy to $59, as higher average daily rates (ADR), which rose 31.8% y-o-y to $87 were offset by lower occupancy. Occupancy dropped 8.4% percentage points y-o-y to 67.7%
However, she says FEHT was able to replace a portion of the inventory returned to the public market with a combination of corporate and leisure guests, thus resulting in higher RevPAR y-o-y.
As of end-1QFY2022, corporate guests made up 78.2% of its business, with leisure and independent travelers accounting for the remaining 21.8%. The bulk of its guests is from Southeast Asia.
That said, FEHT’s hotels are still trading at minimum master lease income, providing stability to its earnings.
Looking ahead, Lock points out that asset enhancements are planned at the Regency House, while The Elizabeth Hotel is expected to undergo an upgrading of reception, common areas and guestrooms, with the expected opening to be in phases from 3QFY2022.
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For the REIT’s serviced residences segment, Lock says revenue per available unit (RevPAU) performed better y-o-y and remains above fixed rent rates.
1QFY2022 RevPAU for the segment increased 24.3% y-o-y to $174 on higher occupancy and ADR, thanks to support from longstay corporate sources and sustained demand from project groups. Occupancy was up 11.9% points y-o-y to 86.6%, and ADR rose 7.5% to $201
In terms of inorganic growth, FEHT remains on the lookout for opportunities, both in Singapore as well as in developed markets overseas.
On this, Lock has upped her DPU estimates for the FY2022 to FY2024 by 4.7% to 5.8% on the lower interest expense due to the lower debt levels.
“We believe FEHT will continue to benefit from the expected increase in tourist arrivals following Singapore’s relaxation of border restrictions,” she says.
Clearer skies ahead: Maybank
Maybank’s Chua Su Tye is positive on FEHT, seeing “clearer skies ahead”.
In his report dated April 28 Chua has noted the increase in distributable income, which surged ahead of consensus and his estimates.
“While FEHT’s hotels continue to be backed by fixed rents, NPI recovery is underway, as RevPARs are set to strengthen with Singapore’s full reopening,” he says.
“[The] divestment of Central Square has bolstered FEHT’s balance sheet, with potential DPU upside from capital distributions,” he adds.
To this end, Chua has upped his DPU forecasts by 8% to 10%, factoring in the higher RevPARs and stronger fundamentals moving into a seasonally stronger 2HFY2022.
As FEHT’s revenue for its serviced residences segment continues to perform above its fixed rent, supported by demand from long-stay residences, Chua expects vacancies for the segment to tighten further, helped by rising relocation demand. Corporate leasing activities will also contribute to the tightening vacancies.
With this, he sees room for ADRs to increase further into the 2HFY2022.
FEHT trading at ‘attractive valuations’: DBS Group Research
DBS’s Geraldine Wong views FEHT as an attractively valued REIT at its current share price.
In her report, Wong notes that the REIT is offering investors an FY2022-FY2023 CAGR of 15% in DPUs. It is also a pure-play proxy to Singapore’s border re-opening and recovery towards living in an endemic Covid-19 world.
At its current share price, Wong sees “compelling reasons to be an ‘early bird’” in the REIT with imminent catalysts driving to narrow the P/NAV gap in the coming years.
She identifies two “critical factors” for the REIT, namely, that NAV will jump by about 5%-6% by end 2022, with a strong correlation with RevPAR recovery. “We believe that markets have not priced in the NAV uplift from the completion of Central Square divestment at approximately a 58% premium to NAV.”
“This will drive NAV higher and coupled with revaluation gains as RevPAR recovers, we see NAV hitting a multi-year high of 91 cents, bringing its P/NAV down to 0.65x,” says Wong.
This is below the historical average and close to levels where the industry is seeing operational headwinds.
Furthermore, she points out that gearing will also drop to the region of about 33%, which will make FEHT one of the least geared REITs and provide headroom for acquisitions.
The second factor is a forecasted DPU recovery as variable rents kick in. With border re-opening, hoteliers may be able to raise rates, and Wong projects RevPAR to double in FY2021 and a further 40% in FY2023.
This will drive a DPU CAGR of 15%, close to pre-Covid levels. “As such, we see the stock trading closer towards P/NAV of 0.8x-0.85x level, similar to pre-Covid levels, which offers upside of over 20%.”
FEHT ‘on recovery path’: Citibank
Citibank’s Brandon Lee is also positive on FEHT’s prospects, noting its 1Q update paints an ongoing recovery of Singapore's hospitality sector, which should continue to improve in light of the recently eased Covid-19 measures and re-opening of international travel.
“Overall, we see its fixed rent and recovery of international travel offering good DPU support going forward. FEHT has outperformed S-REITs year-to-date (y-t-d), but we maintain our ‘Buy’ rating on valuations and optimistic outlook going forward.”
He does warn of some risks to the REIT, including a slowdown in arrivals growth due to weakness in regional economies as Asia accounts for the bulk of arrivals to Singapore.
Another risk could be cautious corporate demand leading to weak demand for hotel room rates and other related spending.
On the other side, upside catalysts include stronger-than-expected arrivals from regional countries driving higher occupancies and room rates, and a stronger-than-expected recovery in corporate demand and business travel.
Businesses and leisure travellers to return: UOB Kay Hian
Finally, UOB Kay Hian analyst Jonathan Koh sees FEHT as preparing to welcome the return of businesses and leisure travellers. Koh’s views come as borders gradually reopen.
FEHT’s portfolio of hotels and serviced residences will stand to benefit from the pent-up demand to travel.
The trust is also preparing to welcome back travellers with its new brands and services, Koh says, referring to the upgrades in Elizabeth Hotel and Regency House.
FEHT’s divestment of Central Square has lowered its aggregate leverage and leaves it well-positioned for its future expansion as well, says the analyst.
In addition, the REIT is the most defensive hospitality REIT among the Singapore REITs (S-REITs).
“All FEHT hotels and serviced residences are under master lease agreements with subsidiaries within sponsor Far East Organisation (FEO). The fixed rent component from its master leases totalled S$67m per year, which is equivalent to 72% of total gross revenue from its hotels and serviced residences in 2019 (pre-Covid-19). These fixed rents formed 98% of total gross revenue in 2021. These 20-year master leases run till 2032,” he says.
As FEHT’s distributable income for the 1HFY2022 comes as in line with Koh’s expectations, the analyst has upped his DPU forecast for the FY2022 by 4% due to the rapid reopening of borders in April and an earlier-than-expected recovery in 2HFY2022.
As of 3.18 pm, shares of FEHT were trading at 68.5 cents, with a FY2022 P/NAV of 0.8 and a dividend yield of 4.5%
