• 2Q19 DPU down 9.9% YoY
• 2H appears to be brighter, so far
• Adjusted our forecasts downwards

Results Missed Expectations

Far East Hospitality Trust (FEHT) posted a weak set of results that were below expectations. 2Q19 gross revenue dropped 2.1% YoY to S$27.9m, while NPI dropped 2.4% YoY to S$25.1m. Due to lower NPI and 10.9% higher finance expenses, 2Q19 DPU dropped 9.9% YoY to 0.91 S cents, coming up to 23.1% of our initial full-year forecast. As at 30 Jun 2019, the average cost of debt was 2.9%, vs. 2.5% as at 30 Jun 2018.

Hotel RevPAR Down 4.5% YoY While SR RevPAU Up 3.0% YoY

As expected, FEHT’s hotel RevPAR was soft this quarter, though the decline was steeper than we had forecasted. Hotel RevPAR dropped 4.5% YoY to S$156 on the back of 2.6% lower ADR and 1.7ppt lower average occupancy for the quarter. The decline was attributed to the absence of major events during the quarter and softness in corporate demand.

Meanwhile, FEHT’s serviced residences RevPAU improved 3.0% YoY to S$174 contributed by a 5.0% higher ADR, partially offset by 1.6 ppt lower average occupancy. This RevPAU stabilization was attributed to a growth of shorterstay bookings at higher ADRs.

Fair Value Remains at S$0.67

Looking ahead, we note that the REIT manager of CDL Hospitality Trusts (CDLHT) disclosed that CDLHT’s SG RevPAR grew 4.1% YoY for the first 28 days of Jul 2019. While we note that FEHT’s SG hotels have underperformed CDLHT’s SG hotels this past quarter in terms of RevPAR growth, the statistic suggests a potentially brighter 3Q19 for the SG portfolios of both REITs. In addition, we see FEHT’s 2Q19 positive RevPAU growth as a sign that the segment is turning around.

After adjusting our DPU forecasts downwards and decreasing our risk-free rate from 2.3% to 2.0%, our fair value remains at S$0.67. Based on our own forecasts, FEHT is trading with a FY19F yield of 5.6%, as at 30 Jul’s close. Maintain HOLD.

Source: OCBC Research - 31 Jul 2019