Company Update: High cash finance costs to weigh on near-term earnings
- Base rents for the five initial hotels will rise 13.3% in FY24
- iclub branded hotels see stronger growth in base/fixed rents
- High cash financing costs to weigh on near-term earnings
- Long-term investment value re-emerged following the heavy selloff. Upgraded to BUY with HK$0.82 TP
Following the removal of travel restrictions in early 2023, the business operations of “Regal” and “iclub” branded hotels have generally been picking up with the momentum improving since the summer vacation. Nonetheless, Regal Airport Hotel, the REIT’s largest hotel, lagged, with occupancy at c.50%. This was mainly due to the slow recovery in demand from air crew, which used to make up >40% of hotel guests, led by the constraints in flight capacity. Overall, short-haul markets such as South East Asia staged a better recovery, while long-haul markets have yet to recover. Elsewhere, F&B revenue should also recover to c.80% of pre-COVID levels.
For FY24, 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, have been set at HK$544m in aggregate, representing an increase of 13.3% y-o-y. While the base rents of Regal Hong Kong Hotel, Regal Kowloon Hotel, and Regal Riverside Hotel will surge 36.4%, 17.2%, and 22.3% to HK$90m, HK$116m, and HK$126m, respectively, that of Regal Airport Hotel and Regal Oriental Hotel will remain unchanged at HK$175m and HK$37m, respectively. Base rents for iclub Sheung Wan Hotel and iclub Fortress Hill Hotel will rise 31.3% and 33.3% to HK$42m and HK$40m, respectively, in FY24. The base rent for iclub To Kwa Wan Hotel is fixed at HK$36m, up 20%. In addition, Regal REIT will take 50% of the excess of the NPI over base rents as variable rents.
Regal REIT has completed refinancing the loans for iclub Sheung Wan, iclub Fortress Hill, and iclub To Kwa Wan in 2H23 with credit margins slightly higher than previously. While the US Fed has paused rate hikes, the HIBOR should remain relatively high in the near term. As all the REIT’s borrowings are on floating interest rates, increased cash finance costs should offset the growth in net rental and hotel income, thus weighing on its near-term earnings.
In the past six months, the unit price of Regal REIT fell 44% amid interest rate hikes. The stock is now trading at a 9.4% distribution yield for FY25. While Regal REIT’s near-term earnings outlook remains challenging, long-term investment value is surfacing following the heavy sell off. Upgrade to BUY with DDM-based TP of HK$0.82.