Result Analysis: A mixed bag

Regal REIT’s FY21 distributable income was 37% lower at HK$311m, dragged by lower net rental income, partially offset by reduced cash finance costs. Final DPU fell 46.1% to HK$0.041, taking the full-year DPU to HK$0.086. This represented payout ratio of 90.1% (FY20: 90.2%). 

Total net rental and hotel income dropped 33% to HK$578.9m, mainly dragged by lower base rents for five initial hotels and two iclub hotels in Sheung Wan and Fortress Hill. With stringent quarantine restrictions for incoming travellers led by the prolonged pandemic, inbound tourism remained at a standstill. Against this backdrop, Regal REIT has adapted its business strategy to the current operating landscape and targets self-quarantine and domestic long-stay guests, and those seeking staycation packages. Regal Hongkong Hotel, Regal Kowloon Hotel and Regal Riverside Hotel would cater to the local market while Regal Oriental Hotel, Regal Airport Hotel, iclub Fortress Hill Hotel and iclub Ma Tau Wai Hotel operated as designated quarantine hotels serving mostly returning residents in 2021. 

The overall occupancy for the five Regal-branded hotels improved to 57.3% in 2021 from 2020’s 37.2%. Even though their combined room rate declined 12.9%, the average RevPAR was 34.1% higher. Since total net property income from the hotel operations from these five hotels was just HK$104.5m, well below the aggregate base rents, no variable rents were earned in FY21. The combined RevPAR of iclub Sheung Wan Hotel and iclub Fortress Hill Hotel registered 15.1% growth as room rates grew 6.7% with occupancy 5.6ppts higher at 77.7%. As the NPI for each hotel fell short of the rent, only base rents were earned. RevPAR of self-operated iclub Wan Chai Hotel grew 14.4% higher in FY21 on increased occupancy and room rates. However, NPI was minimal at c.HK$1m. 

Cash finance costs fell sharply by 35% to HK$130m thanks to lower HIBOR. As of Dec-21, Regal REIT had total debt of HK$10.1bn (Jun-21: HK$9.9bn). This put its gearing at 43.9%. (Jun-21: 44.8%) All outstanding loans are subject to floating rates. 

For FY22, the base rents for the five “initial hotels”, including Regal Airport Hotel, Regal Hongkong Hotel, Regal Kowloon Hotel, Regal Oriental Hotel and Regal Riverside Hotel, has been set at HK$475m in aggregate, representing an increase of 3.3% y-o-y. While base rents of Regal Hongkong Hotel, Regal Kowloon Hotel, Regal Oriental Hotel and Regal Riverside Hotel will rise 8.2%, 3.2%, 5.7% and 6.3% to HK$66m, HK$96m, HK$37m and HK$101m respectively, that of Regal Airport Hotel will fall by a marginal 0.6% to HK$175m. For iclub Sheung Wan Hotel and iclub Fortress Hill Hotel, the base rents will rise modestly to HK$27m in FY22 from FY21’s HK$26m. In addition, Regal REIT will take 50% of the excess of NPI over base rents as variable rent. For iclub Ma Tau Wai, the initial fixed rental period of five years is still effective till Sep-22. With higher base/fixed rents, we project Regal REIT’s gross rental revenue to be 3% higher in FY22. 

With the COVID resurgence in early 2022, four quarantine hotels and Regal Kowloon Hotel joined the Community Isolation Facility Scheme to accommodate those COVID-19 patients with mild or no symptoms, commencing from late Feb. With the lifting of flight ban on nine countries, the usage of these five hotels has been changed to serve as quarantine facilities or other anti-pandemic purpose designated by the government. 

Regal REIT is trading at a distribution yield of 4.6% for FY22. While the revenue should grow modestly under the new rental package, expected higher financing costs led by interest hike would drag distribution income. The fifth wave of COVID outbreak has delayed the border re-opening with Mainland China which plays a crucial in full recovery of hotel sector. Hence we maintain HOLD with DDM-based TP of HK$1.60