4 Local Hospitality REITs! Let’s Take A Look At Frasers Hospitality Trust?

This is the last part to a 4 part series where I share my insights and analysis on the 4 local hospitality REITs listed on the SGX. If you haven’t seen the previous 3 check them out here, Ascott Residence Trust, CDL Hospitality Trust and Far East Hospitality Trust. In this article, I’ll be sharing all you need to know about Frasers Hospitality Trust.

Frasers Hospitality Trust (SGX:ACV)

Frasers Hospitality Trust

Property Overview

As at Q2 FY2020, Frasers Hospitality Trust owns a total of 15 properties, 9 of which are hotels and the remaining 6 are serviced residences. These properties are spread across multiple countries like Singapore, Australia, UK, Japan, Malaysia and Germany.

Frasers Hospitality Trust's Portfolio
Taken from Frasers Hospitality Trust’s Q2 FY2020 Presentation Slides

Of its 15 properties, 4 of which are part managed by Frasers Hospitality Trust and third-party operators. The 6 serviced residences are all fully managed by Frasers Hospitality Trust.

Frasers Hospitality Trust's Portfolio
Taken from Frasers Hospitality Trust’s Q2 FY2020 Presentation Slides
Frasers Hospitality Trust's Portfolio
Taken from Frasers Hospitality Trust’s Q2 FY2020 Presentation Slides

Financial Ratios

Frasers Hospitality Trust's Q2 FY2020 Results
Taken from Frasers Hospitality Trust’s Q2 FY2020 Presentation Slides

The gearing for Frasers Hospitality Trust stands at a conservative 36% and is currently trading at a P/NAV of 0.66. This means that you are only paying 66 cents for every $1 of NAV, a great bargain no doubt!

Frasers Hospitality Trust's Q2 FY2020 Results
Taken from Frasers Hospitality Trust’s Q2 FY2020 Presentation Slides

Furthermore, the interest cover ratio (ICR) is at a healthy 4.1x, higher than 3x, which is my optimal requirement. As a result of having a healthy ICR, this allows them to gear up to 50% if they choose to. This is due to the new MAS regulation which allow REITs to gear up to 50% if they maintain an interest cover ratio above 2.5.

Comparatively, the effective cost of borrowing is at 2.4%, which is around the average among its peers. Also, it is good to note that they do not have any debt (excluding short-term loans) maturing in the next 2 FYs so, they can use this chance to preserve capital.

Potential Upsides

Huge Pipeline with 17 ROFR Assets

From Frasers Hospitality Trust’s IPO prospectus, we can see that there are 18 properties that they have a ROFR to. So far, they have only acquired 1, which is the Sofitel Sydney Wentworth. As a result, there are 17 more ROFR assets waiting to be acquired. Furthermore, these assets are well diversified, spread across multiple countries like Singapore, China, Australia, etc.

PropertyCountry
Capri by Fraser, Changi CitySingapore
Fraser Place Robertson WalkSingapore
Fraser Place ManilaPhilippines
Fraser Residence Sudirman JakartaIndonesia
Le Meridien Angkor, Siem ReapCambodia
Fraser Suites BeijingChina
Crowne Plaza Hotel, KunmingChina
Holiday Inn Hotel, KunmingChina
InterContinental, AdelaideAustralia
Hyatt Hotel CanberraAustralia
Fraser Place MelbourneAustralia
Capri by Fraser, BrisbaneAustralia
Fraser Suites PerthAustralia
Capri by Fraser, FrankfurtGermany
Capri by Fraser, BarcelonaSpain
Fraser Suites Kensington, LondonUnited Kingdom
Plaza Athenee, New YorkUSA
From Frasers Hospitality Trust’s IPO prospectus

In view of Frasers Hospitality Trust’s gearing being relatively low, they can actually do acquisitions through debt fully rather than with a combination of debt and equity.

Though, I would like it if they did the acquisition with a combination of debt and equity, allowing investors to invest more capital, assuming the acquisition is yield and DPU accretive, This can help the REIT maintain low gearing but still bring value to investors.

Potential Downsides

Management Fees Are Not Aligned with Investors’ Interest

Frasers Hospitality Trust’s management fee structure is not as aligned with investors’ interest as compared to its peers. The structure works as such.

Base Fee0.3% of Gross Asset Value
Performance Fee5.5% of Distributable Income
Management Fee Structure for Frasers Hospitality Trust

In effect, it does not motivate the management to actually do acquisitions and divestments that benefit investors.

For example, imagine an acquisition that is DPU or Yield dilutive, investors are actually losing out on value. In contrast, the management gets paid a higher performance fee due to the fact that post-acquisition, the total distributable income will increase.

Personally as a dividend growth investor, I favor performance-based fee structures that incentivise managers to grow the DPU year on year, through DPU accretive acquisitions. For this reason, I favor REITs that have a similar fee structure to Mapletree North Asia Commercial Trust (MNACT), whereby the performance fee is calculated based on the growth in DPU year on year.

Mapletree North Asia Commercial Trust's Management Fee Structure
Taken from Mapletree North Asia Commercial Trust’s Q4 FY19/20 Presentation Slides

Most Impacted Among Peers

Additionally, in comparison with its peers, using the quarter ending in March, Frasers Hospitality Trust’s performance seems to be the worst. Having its GR fall by 41.5% coupled with their NPI falling by 52% year on year,

Frasers Hospitality Trust's Q2 FY2020 Results
Taken from Frasers Hospitality Trust’s Q2 FY2020 Presentation Slides

As an illustration, if we assume a conservative 40% decrease in their NPI and GR for the entire FY2020, and that Frasers Hospitality Trust will conserve around 80% of their Distributable Income, we are looking at a conservative DPU decrease of at least 50%.

Assuming Singapore moves into Phase 2 of its Circuit Breaker re-opening by Q3 of 2020 and that the other countries such as Australia and Japan start opening up their lockdowns by then as well, we can safely assume a conservative 10% increase in DPU year on year.

@ $0.47/shareFY19Realistic FY20 ForecastRealistic FY21 Forecast
DPU0.0441290.0220645‬0.02427095
Yield9.39%4.69%5.16%
DPU Forecast

Final Thoughts

In conclusion, among the 4 local hospitality REITs, I would place Frasers Hospitality Trust at the bottom. Even though there is a huge upside potential coming from its pipeline ROFR assets, at its current valuation, the other 3 REITs are much more attractive and offer a better risk to reward ratio.

Also, I personally don’t like the fee structure that they have as it’s not aligned with investors’ interest. Henceforth, I would buy more of Ascott Residence Trust, CDL Hospitality Trust and Far East Hospitality Trust simply.

As always, you can take a look at my portfolio updates to see my current positions! P.S. I’m running a telegram chat group for you guys to share and discuss investment-related topics so come on in! I’ll be there too! You can join the chat here: https://t.me/joinchat/D4iHeEVapnGC1lWcFEupVw

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