Analysts at CGS International (CGSI) and Maybank Securities are keeping their respective “add” and “buy” calls on Far East Hospitality Trust Q5T (FEHT) at unchanged target prices of 78 cents and 80 cents respectively following the REIT’s 3QFY2024 ended Sept results.
CGSI analysts Natalie Ong and Lock Mun Yee note that gross revenue for the period fell 4.8% y-o-y to $28.7 million, mainly due to the absence of one-off, non-room revenue for hotels contracted for government isolation in 3FY20Q23. Excluding this, revenue was 3.9% higher y-o-y.
FEHT’s hotel revenue fell 8.2% y-o-y while revenues from serviced residences (SR) and commercial properties were 3.0% and 9.9% higher respectively y-o-y, from higher retail occupancies and rents.
As a result, hotel revenues per average room (RevPARs) for 3QFY2024 rose 2.8% y-o-y to 101.3% of 3QFY2019 levels, driven by a higher average daily rate (ADR) as the REIT’s portfolio saw greater pricing flexibility after exiting government contracts, offsetting a 1.2 percentage point (ppts) decline in occupancy.
On a 9MFY2024 basis, hotel RevPAR was up 1.5% y-o-y.
Ong and Lock write in their Oct 31 report: “Following the exit from government contracts, revenue contribution by trade segment normalised to pre-Covid-19 trends, with the leisure segment accounting for the majority of 9MFY2024 revenue.”
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In the 3QFY2024 analyst call with FEHT, the analysts note that Chinese tourists made up around 20% of hotel guests in the quarter, almost double of 2019 levels.
“We think this could be evidence of a shift in Chinese consumption patterns given that FEHT’s hotels are mostly mid-tier. We note that all of FEHT’s hotels that have exited government contracts are performing above government contract levels, except Village Changi where the retail space has yet to be backfilled.”
Meanwhile, gearing and cost of debt remained stable q-o-q at 30.8% and 4.1%, respectively.
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FEHT also has 40.1% of its total borrowings on fixed rates. With interest rates falling, Ong and Lock note that the REIT’s management views that the cost of borrowing has peaked in the 3QFY2024 and will opportunistically seek to enter into more hedges to raise the proportion of fixed borrowings to around 60%.
In terms of acquisition, FEHT is actively exploring Japan and the UK. Strong interest from local and international buyers has compressed asset yields in Japan while yield spreads in the UK are just starting to turn positive.
"We believe a Singapore acquisition from the sponsor is a low-hanging fruit as FEHT can work with its sponsor to structure an accretive deal,” write the analysts.
Re-rating catalysts noted by the analysts include geographical diversification, accretive acquisitions/divestments and downtrading behaviour in favour of mid-tier hotels. Meanwhile, downside risks include lower-than-forecast leisure and/or corporate travel demand.
Meanwhile, Maybank’s Krishna Guha notes that while FEHT is focusing on making acquisitions, it could also divest non-core assets.
He concludes: “While the business update had few moving parts because of one-off income, we expect top-ups and projected rate cuts to keep the distribution profile relatively unchanged.”
Upside swing factors noted by him include an earlier-than-expected pick-up in corporate demand, better-than-anticipated RevPAR and variable rents, as well as accretive acquisitions where cap rates exceed cost of funds or divestments at low cap rates.
Conversely, sizable increases in hotel and serviced apartment room supply without corresponding growth in demand, a deterioration in the global economy, and a sharper-than-expected rise in interest rates.
As at 4.15 pm, shares in FEHT are trading flat at 62 cents.
