CGS-CIMB Research is reiterating its “add” recommendation on Far East Hospitality Trust (FEHT) but with a lowered target price of 73 cents from 80 cents previously, as analysts Lock Mun Yee and Natalie Ong factor in higher risk-free rates amid a rising interest rate environment.
Nonetheless, Lock and Ong have also kept FEHT its top pick within the hospitality sector.
Looking at the trust’s latest 3QFY2022/9MFY2022 ended September update, net property income was $19.7 million in 3QFY2022 (+7.8%) and $57.2 million in 9MFY2022 (+4.9%), both of which was in line with the analysts’ estimates, as it formed 26.5% and 76.8% of their FY2022 estimates respectively.
Lock and Ong noted a strong recovery in the trust’s operations amid the resumption of travelling. Revenue for the third quarter grew 2.0% y-o-y to $21.2 million, despite the divestment of Central Square on Mar 24.
On a same-store basis, 3QFY2022/9MFY2022 revenue for hotels increased by 4.7%/1.6% y-o-y, as most hotels continue to be on minimum rent, while the trust’s serviced residences revenue gained 44.9%/22.2% y-o-y and revenue from commercial premises grew 19.1%/14.8% y-o-y. Hence, the analysts are in the view that the Central Square divestment is masking the revenue growth in both the serviced residences and commercial premises.
Meanwhile, gearing stayed low at 33.6%, but cost of debt up inched up q-o-q from 1.8% to 2.5%.
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During the period, hotel revenue per average room (RevPAR) saw a significant increase, as it gained 107.8% y-o-y in 3QFY2022 to $137 and 53.8% y-o-y in 9MFY2022 to $80. However, this was still at 84% and 64%, respectively, of pre-Covid levels. This was mainly because of the closure of Vibe Hotel Singapore Orchard (formerly The Elizabeth Hotel) from February to August for renovations. Vibe Hotel represents 9.2% of hotel room inventory and has just reopened in early-November.
The analysts note that the rebranding initiative at Vibe Hotel has paid off, with average daily rate (ADR) increasing 33% from $150 to $200.
While FEHT’s hotels are not located along the Formula One (F1) circuit, its city hotels benefited from the uptick in F1 and meeting, incentive, convention, and exhibition (MICE) event travellers during the weeks surrounding the F1 event. “We understand that FEHT’s room rates were up to $100 higher during that period,” note Lock and Ong.
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Meanwhile, the trust’s serviced residences continue to perform above pre-Covid levels, with RevPAR increasing 43.7%/25.7% y-o-y in 3QFY2022/9MFY2022, helped by strong residential rents which lifted the long-stay serviced residences.
On the other hand, the analysts like that four out of nine of FEHT’s hotels are on government contacts which will run until December 2022 to January 2023. These hotels were re-contracted in August this year at higher rates.
While the contracted rates are below pre-Covid-19 levels, these hotels were operating above minimum rent as gross operating profit was boosted by lower operating cost due to the low utilisation rate. While a few of its hotels, including the four government-booked hotels, were operating above minimum rent in 3QFY2022, only one hotel started generating variable income as variable rent is calculated on a yearly basis, and hotels would need to make up for the weaker operation pre-reopening in 1HFY2022.
“We understand that the ramp-up rate for hotels exiting government bookings has improved significantly compared to end-2021/early-2022. FEHT’s joint venture assets, The Outpost and Village Sentosa, were taken off government contracts in August and achieved 60% occupancy rate within one month,” note the analysts.
Units in FEHT closed at 60 cents on Nov 8.
Photo: Vibe Hotel
