Far East Hospitality Trust garners bright outlook from analysts

Analysts are pleased with Far East Hospitality Trust (FEHT), citing the group's healthy first half results.

Analysts are pleased with Far East Hospitality Trust (FEHT) Q5T, citing its strong y-o-y growth as the group recorded healthy results for 1HFY2023 ended June.

The group achieved a 26.9% y-o-y growth in gross revenue of $52 million with a distribution per stapled security (DPS) of 1.92 cents, an improvement of 24.7% y-o-y. 2QFY2024 revenue grew 34.1% y-o-y to $26.9 million, driven by the hotel segment with a rise of 41.2% y-o-y or $5.9 million, whilst revenue from service residence (SR) grew by $0.4 million or 16.3% y-o-y and both commercial and retail space revenue was up $0.6 million or 16.4% y-o-y.

On a same-store basis, 1HFY2023 revenue for hotel, SR and commercial spaces surpassed 1H2019 levels.

See more: Far East Hospitality Trust reports DPS of 1.92 cents for the 1HFY2023, up 24.7% y-o-y

Following the strong set of results, analysts from CGS-CIMB Research and Maybank Research have kept their “add” and “buy” calls at unchanged target prices of 77 cents and 80 cents respectively.

CGS-CIMB’s Natalie Ong notes that while room rates trended close to historical highs in 1HFY2023, occupancy lagged at 78%. The 2QFY2023 hotel revenue per available room (RevPAR) of $131 reached 91.8% of 2019 levels.

Meanwhile, FEHT’s hotel RevPAR lagged behind its peers, with both CapitaLand Ascott Trust (CLAS) and CDL Hospitality Trusts (CDLHT) at 127% of 2QFY2019 levels due to the three hotels in the gestation period which exited their respective government block-booking contracts in early March.

In FEHT’s 2QFY2023 results briefing with analysts, management shared that 2QFY2023 hotel RevPAR (excluding gestating hotels) reached 106% of 2QFY2019 levels. The three hotels that exited government block-booking contracts in March are ramping up well, with one of the hotels achieving occupancy of 60% within its first month of public bookings.

Notably, FEHT has one more hotel, Oasia Novena, that will remain under government contract until October. Given Oasia Novena’s central location, management is confident that demand will be healthy when it returns to the market for public bookings.

Meanwhile, Ong observes that SRs continued to hold up well, with a 2QFY2023 RevPAR of $224 (-0.4% q-o-q/+16.1% y-o-y), reaching 123.1% of 2QFY2019 levels.

The analyst also notes the group’s stable balance sheet, with 2QFY2023 gearing, average cost of debt and interest rate coverage all steady q-o-q at 32%, 3.2% and 3.6x respectively.

“In our previous report, we highlighted that geographical diversification would be a key re-rating catalyst for FEHT. In its 2QFY2023 results briefing with analysts, management shared that while FEHT’s low gearing of 32% and right of first refusal pipeline from the sponsor position it well for acquisitions, acquisitions in Singapore may not be sufficiently accretive amidst the high interest rate environment,” says Ong.

The group has elaborated its starting of overseas acquisitions opportunities evaluation and would prefer to gradually increase its overseas exposure over the next five years, up to a maximum of 20% of assets under management (AUM).

While the sponsor has assets in Australia and the UK, Ong understands the group will also look at deals from third-party sellers with limited service, mid-scale or upscale hotel assets in gateway cities.

In her view, catalysts for re-rating include geographical diversification, accretive acquisitions/divestments and faster ramp-up period for its hotels that have exited government block-booking contracts.

Meanwhile, Maybank analyst Krishna Guha attributes his positive rating to an improving visitor arrival environment in Singapore and the group’s existing lease structure.

Guha says: “Rebound of the local hospitality sector is likely to be sustained by the healthy pipeline of events and activities. Further, master lease structure and top-ups from divestment gains from Central Square will stabilise distribution in case of any speed bumps on the road to recovery.”

However, Guha also notes that FEHT’s q-o-q basis lagging of 2QFY2023 RevPAR should be closely observed.

“This may be due to seasonality but needs to be monitored in the light of slower-than-expected return of Chinese travellers, supply pipeline and plateauing of residential rents in Singapore,” opines the analyst.

Downside risks include lower-than-forecast leisure or corporate travel demand which would impact FEHT’s occupancy and room rates.

As at 12.15pm, shares in FEHT are trading 0.77% down at 64 cents on Aug 2.

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