• Hotel RevPAR drops 1.3% YoY
• SR RevPAU falls 5.7% YoY
• Maintain HOLD

2Q17 Results Within Expectations

Far East Hospitality Trust’s (FEHT) 2Q17 results reached the higher end of our expectations. 2Q17 DPU dropped 4.0% YoY to 0.97 S cents or 25.4% of our initial full-year forecast. 1H17 DPU dropped 9.1% YoY to 1.90 S cents or 49.8% of our full-year forecast. As a comparison, 1H15 and 1H16 DPU made up ~48% each of their respective full-year DPUs, though we do expect slightly greater downward pressure for hotel RevPARs in 2H17 given that most of the room supply injection in 2017 is back-end loaded.

SR Occupancy Recovered 10.3 Ppt QoQ

2Q17 Hotel RevPAR dropped 1.3% to S$134, with the REIT manager noting that demand for hotel accommodation picked up QoQ, although the increased supply of hotel rooms and soft corporate business put a damper on room rates. Serviced Residences (SR) RevPAU declined 5.7% YoY to S$177, mainly due to a 4.5 ppt YoY drop in occupancy to 81.5%. Nonetheless, we note that SR improved 10.3 ppt QoQ from 71.2% in 1Q17.

In relation to the recent reduction in minimum stay duration for private properties from six to three months, we estimate that 10- 20% of the stays at FEHT’s SRs are 3-6 months while a greater proportion of the stays are of a 1-3 month duration.

In the short-term, as homeowners take time to adjust to the regulation, we believe FEHT’s SRs will remain largely unaffected. Nonetheless, there may be a greater impact 2-3 years down the line should corporates be willing to offer employees more flexibility in choosing their own housing arrangements.

FV Increases to S$0.66

We increase our nominal growth rate of dividends in mature state from 1% to 1.5%. After adjustments, our fair value increases from S$0.60 to S$0.66. While FEHT appears cheap with its units trading at a ~0.75x PB, we note that the NPI yield on its investment property portfolio (as valued end-FY16) is relatively low at 4.0%.

Against last Friday’s closing price, FEHT is trading at a 5.9% FY17F yield and 6.3% FY18F yield. FEHT’s gearing ratio as at 30 Jun 2017 is 32.8%. Maintain HOLD.

Source: OCBC Research - 7 Aug 2017