With gearing at just 31.3% as at end-2023, Far East Hospitality Trust Q5T (FEHT) is looking for acquisitions this year, likely in Japan or Singapore. At the release of the REIT’s results for FY2023 ended Dec 31, 2023, the manager signalled that it continues to look for acquisitions in Japan given the positive yield spread, with asset yields around 4%.
For Singapore, however, the REIT manager says it will wait for interest rates to moderate, likely in 2H2024, before revisiting acquisitions here.
While the manager of FEHT mulls its options, CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee are keeping “add” on the REIT but with a lower target price of 75 cents, down from 77 cents previously.
Ong and Lock trimmed their target price to factor in higher interest costs, partially offset by higher net property income (NPI) margin assumptions.
“While assets in Singapore are pricier and come with lower yields, similar to the Oasia Downtown acquisition [in 2018], the sponsor could sell its assets with a partial land lease, thereby lowering the purchase value and making the acquisition more accretive for FEHT, in our view,” say Ong and Lock in a Feb 14 note.
FY2023 results
FEHT released its results for FY2023 earlier that day. The REIT proposed distribution to stapled securityholders (DPS) of 4.09 cents for the full year, 25.1% higher y-o-y. DPS for the 2HFY2023 also rose by 25.4% y-o-y to 2.17 cents.
The higher DPS comes as the REIT saw higher gross revenue, NPI and distributable income on a y-o-y basis for both the full-year and six-month period.
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The distribution was a slight beat to CGS-CIMB’s estimate, at 106.9% of its forecasts, which the analysts attributed to lower utilisation rates and operating costs for hotels under government contracts.
Gross revenue for the FY2023 grew by 27.8% y-o-y to $106.8 million due to improvements across all segments. FY2023 NPI rose by 27.7% y-o-y to $98.7 million due to the higher revenue.
Ong and Lock see more occupancy-driven recovery for the hotel portfolio in FY2024.
They note that FY2023 hotel revenue per available room (RevPAR) recovered to just 96% of 2019 levels compared to FEHT’s peers, which reached around 120%. This was because four of FEHT’s hotels were ramping up after exiting their respective government contracts during the year.
Meanwhile, FY2023 serviced residence (SR) RevPAR reached as high as 126% of 2019 levels. Occupancy for the retail and office stood at 80% and 100% respectively, the former depressed due to vacancy at Village Changi, which has not been backfilled since the hotel exited its government contract in March 2023, note the analysts.
Cost of debt averaged 3.3% in FY2023 while interest coverage ratio stood at 3.5x. FEHT has refinanced some $225 million of loans maturing in March with three- and seven-year sustainability-linked debt.
With 42.6% of debt fixed at end-FY2023, management has guided for FY2024 cost of debt to average 4% post-refinancing as half of the interest rate hedged will roll off.
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Given its low interest rate hedge, management said the $18 million additional incentive fee from the divestment of Central Square could be used to cushion the impact of higher interest rates. “Nonetheless, we expect interest coverage ratio to fall to 2.8x in FY2024F amid higher interest expense,” writes Ong and Lock.
Mega-events to drive RevPAR recovery
PhillipCapital Research analyst Liu Miao Miao is more optimistic about FEHT, keeping “buy” in a Feb 15 note with an unchanged target price of 79 cents.
Liu notes that in FY2023, FEHT’s hotels saw a recovery in leisure travellers and corporate groups, which led to a higher average daily rate (ADR) of $170, 36.1% higher y-o-y. Average occupancy improved by 6.3 percentage points y-o-y to 80.1%.
“We expect RevPAR to continue trending upward in FY2024, with more support from 2Q2024 onwards due to seasonality. Income from variable rental surged by more than six times, surpassing pre-Covid-19 levels by 1% and contributing to 25% of gross revenue amidst the leisure recovery,” writes Liu.
That said, she expects a decline in contributions from corporate travellers, potentially driving ADR higher in the absence of corporate discounts. “Occupancy is forecast to ramp-up in FY2024, thanks to major events such as the Taylor Swift Eras Tour and Singapore Airshow in 2024; current forward bookings appear promising.”
During the Coldplay concerts in January, for example, occupancy improved by 10% on average, and RevPAR showed a 15% uplift, notes Liu.
All hotels have concluded their government contracts and are prepared to make full contributions in FY2024, she adds. “With the upcoming mega events, the occupancy rate is expected to remain resilient, as indicated by a surge in forward bookings. Coupled with the return of Chinese travellers due to the 30-day visa-free policy, there is anticipation for RevPAR to rebound to pre-pandemic levels.”
Chinese travellers and Japanese travellers stand at 40% and 50% of pre-Covid-19 levels, respectively. “However, with the expected recovery of flight capacity, we anticipate positive growth from these demographics,” adds Liu. “Moreover, NPI is projected to remain stable, capitalising on the decrease in electricity costs, which are forecasted to decrease by up to 40% in FY2024.”
Units in Far East Hospitality Trust closed 0.5 cents higher, or 0.79% up, at 64 cents on Feb 15.
Infographic: PhillipCapital Research
