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)
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.
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.
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!
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.
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.
|Capri by Fraser, Changi City||Singapore|
|Fraser Place Robertson Walk||Singapore|
|Fraser Place Manila||Philippines|
|Fraser Residence Sudirman Jakarta||Indonesia|
|Le Meridien Angkor, Siem Reap||Cambodia|
|Fraser Suites Beijing||China|
|Crowne Plaza Hotel, Kunming||China|
|Holiday Inn Hotel, Kunming||China|
|Hyatt Hotel Canberra||Australia|
|Fraser Place Melbourne||Australia|
|Capri by Fraser, Brisbane||Australia|
|Fraser Suites Perth||Australia|
|Capri by Fraser, Frankfurt||Germany|
|Capri by Fraser, Barcelona||Spain|
|Fraser Suites Kensington, London||United Kingdom|
|Plaza Athenee, New York||USA|
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.
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 Fee||0.3% of Gross Asset Value|
|Performance Fee||5.5% of Distributable Income|
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.
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,
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/share||FY19||Realistic FY20 Forecast||Realistic FY21 Forecast|
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.
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