Citi Research analyst Brandon Lee has downgraded his call on Far East Hospitality Trust (FEHT) to “sell” from “buy” as he sees increasing industry headwinds. The analyst has also slashed his target price estimate to 53 cents from 73 cents previously for the same reasons.
“We expect further moderation in the growth of Singapore’s hospitality sector, with RevPAR strength unlikely to be sustained given slower growth in visitor arrivals and continued growth in supply of hotels,” Lee writes in his report dated Feb 17 (US time). RevPAR refers to revenue per available room.
The analyst also observed that the REIT’s results largely mimics the weakening trends in Singapore’s hospitality sector with FEHT’s hotel performance moderating through the FY2024 ended Dec 31, 2024.
FEHT’s hotel RevPAR growth of 5% y-o-y in the 2HFY2024 moderated slightly from the 6% y-o-y growth pencilled in during the 1HFY2024. In FY2024, FEHT’s hotel RevPAR growth slowed materially to 6% y-o-y compared to the 48% y-o-y surge in FY2023, Lee notes.
“Moreover, RevPAR growth in FY2024 appears to be largely supported by pricing (which is unlikely to sustain, in our view) as average daily rates (ADR) grew 4.5% y-o-y, while occupancy expanded only [less than] one percentage point to 81.0% (versus 85+% pre-Covid),” the analyst writes.
According to the Singapore Tourism Board (STB), RevPAR growth among Singapore hotels in 2024 also slowed to 3% y-o-y compared to the 21% y-o-y growth seen in 2023. The softer 2HFY2024 suggests a weakening of momentum, says Lee.
See also: UOBKH lowers TP for Delfi by 3% to 82 cents after earnings missed expectations
FEHT’s occupancy of 81% in FY2024 also suggests that it may be underperforming the wider market’s rate of 81.4%, the analyst adds.
Lee’s latest report comes after his positive read on FEHT’s 2HFY2024 results even though it missed consensus estimates.
“FEHT’s 2HFY2024 results revealed improving RevPAR growth momentum in hotels supported by ADR growth (also seen for serviced residences or SRs), which reflects recovery of Singapore's hospitality sector,” he wrote in his Feb 12 report. “However, this could not fully mitigate the impact from weaker occupancies (for both hotel and SRs) and higher financial expenses leading to 4% y-o-y decline in [the REIT’s] distribution per unit (DPU).”
The analyst’s bearish sentiment on FEHT extends to hospitality Singapore-listed REITs with meaningful exposure to Singapore hotels, including CDL Hospitality Trusts (CDLHT), which he also has a “sell” call on.
“[We] wait for meaningful signs of recovery in underlying demand before turning positive on the sector,” Lee writes.
On FEHT specifically, the analyst believes any DPU-accretive acquisitions, potentially made in overseas markets like Japan and the UK, could be a major share price catalyst although any potential transaction at this point could be uncertain due to less attractive yield spreads on the back of higher interest rates.
In addition to the downgrade and lower target price, Lee has cut his FY2025 and FY2026 DPU estimates by 2.1% and 3.4% to 3.86 cents and 3.88 cents respectively. The lower DPU estimates reflect his lower RevPAR forecast and the change in proportion of management fees paid in units, mitigated by lower interest expenses. FEHT’s management has opted to be paid 60% in units, down from 90% previously. The analyst has also introduced his FY2027 DPU estimate of 3.95 cents.
“Our revised DPU projections reflect FY2025/FY2026/FY2027 DPU growth of -5.7/+0.5/+1.9 and FY2025/FY2026/FY2027 yields of 6.5%/6.5%/6.6%%, respectively,” he writes.
As at 10.28am, units in FEHT are trading 0.5 cents lower or 0.83% down at 59.5 cents.
