Analysts like FEHT for its higher 2HFY2024 hotel RevPAR and potential to conduct M&As

In FY2024 FEHT reported gross revenue of $108.7 million, a 1.8% y-o-y increase due to higher top-line revenue across all three of its operating segments, hotels, serviced residences and commercial premises, which grew by 0.9% y-o-y, 0.2% y-o-y and 7.3% y-o-y respectively.

Net property income (NPI) rose 0.6% y-o-y to $99.3 million, while distributable income declined 11.3% y-o-y to $66.6 million due to a higher proportion of management fees paid in cash, and high financing costs.

For the 2HFY2024, hotel revenue per available room (RevPAR) grew 5% y-o-y to $147, primarily due to higher room rates, which the DBS analysts note are reflective of the higher hotel room rates across the island. 

The REIT’s serviced residences RevPAR declined 1.6% y-o-y in 2HFY2024, primarily from a 4.2 percentage point (ppts) y-o-y decline in the occupancy rate to around 83%. All in all, year-end portfolio valuations rose 0.2% y-o-y to $2.52 billion.

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Average occupancy stood flat due to the transition of FEHT’s remaining properties away from government contracts, which had full occupancy previously. 

While FEHT’s FY2024 DPU slightly missed Wong and Tan’s estimates, the REIT’s hotel performance matched their thesis that FEHT’s asset enhancement initiatives (AEIs) would be completed in time to capture the return of Chinese demand to Singapore in 2024.

The REIT is also tipped to benefit from the estimated 17 million to 18.5 million tourists arriving in Singapore in 2025. FEHT’s rooms, priced at around $200 per night, is a “sweet spot” for budget-conscious Chinese travellers, Wong and Tan note.

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In addition to the AEIs, the rebranding of FEHT’s older assets such as Vibe Hotel Orchard, will put FEHT in a “better position to capture market share in Orchard.” Vibe Hotel Orchard now commands a higher RevPAR of 64% compared to its pre-AEI numbers.

With one of the lowest gearing ratios among Singapore REITs (S-REIT) at 30.8%, FEHT’s capital management is stable, placing it in a favourable position to execute further acquisitions this year. 

Potential acquisition targets will include FEHT’s right-of-first-refusal (ROFR) assets owned by the sponsor, including the remaining around 70% stake in Sentosa JV or The Clan Hotel, a swankier asset in the central business district fringe that attracts business travellers.

“The acquisition of either asset will be highly dependent on interest rates – we predict that the market lending rate needs to reduce to the low 3% handle for either deal to be accretive to DPU,” write Wong and Tan.

Citi’s Lee also notes FEHT’s potential for acquisitions thanks to its low gearing which implies an ample debt headroom of over $350 million before hitting a gearing level of 40%.

The analyst values FEHT’s revalued net asset value (RNAV) for its hotels and serviced residences at weighted average cap rates of 5.45% and 4.7%, respectively, but he has not factored in any potential earnings accretion or dilution from any unannounced acquisitions in his valuation.

Meanwhile, DBS’s Wong and Tan’s new target price has factored in a change in management fee structure to the current 60:40 in units, lower capital gains assumption of $3.8 million for FY2025, and organic growth assumptions for FEHT’s hotel portfolio in the low single-digit handle. 

The analysts from DBS and Citi also like FEHT for its relatively high yield of around 6%. DBS’s revised DPU of 3.7 cents and 3.8 cents for FY2025 and FY2026 implies a yield of 6.1% and 6.3% respectively.

As at 3.29 pm, units in FEHT are trading flat at 60.5 cents.