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Far East Hospitality Trust Sees Its Distributions Decline – Is Everything Okay?

Far East Hospitality Trust (SGX: Q5T) released its third quarter results on Friday Morning.

The trust is the first and only Singapore-focused hotel and serviced residence hospitality trust listed here. Its portfolio consists of 12 properties – 8 hotels and 4 serviced residences – such as Rendezvous Hotel Singapore, Orchard Parade Hotel, Village Hotel Changi, and Regency House.

Financial highlights

For the quarter ended 30 September 2014, gross revenue declined 1% year-on-year from S$31.4 million to S$31.1 million. This was mainly due to weaker performance from the hotels. Consequently, net property income dipped by 1.2% to S$28.2 million.

With the top-line decline, it’s perhaps no surprise to see that the trust’s distributions had fallen as well. On a year-on-year basis, income available for distribution dropped by 3.1% to S$23.45 million while distribution per stapled security (DPS) had an even larger decline of 6.4% to 1.32 Singapore cents. The latter phenomenon – the larger drop in DPS as compared to income available for distribution – was the result of a larger base of units in the trust after it had issued new units of itself to the previous owners of Rendezvous Hotel Singapore and Rendezvous Gallery for the purchase of the properties in August 2013.

Operational performance

Moving on to operational highlights, revenue per available room (RevPAR) for the trust’s hotels was at S$160, 3.9% lower year-on-year. Even though occupancy increased to 87.1% from 86.3% last year, the decline in the average daily rate (ADR) of 4.8% to S$183 led to the lower RevPAR.

On the serviced residences front, revenue per available unit (RevPAU) of S$230 for the latest quarter was a slight uptick of 0.3% year-on-year. Increase in occupancy from 90.2% to 92.2% helped to buoy the RevPAU, even though ADR came down 1.9% to S$250. Bigger contribution from longer stay businesses at the serviced residences helped to improve the occupancy and compensate for the drop in ADR.

Financial strength

Far East Hospitality Trust’s gearing ratio, as of 30 September 2014, was at 31.4%. That’s a small rise from 30.9% at the end of June. The trust’s average cost of debt is around 2.2% per year while the weighted average debt to maturity is 2.5 years.

It’s a good thing to see that the trust currently has low costs for its borrowings. But with 40% of its total debt load of S$798 million having floating rates, investors might want to watch for rising interest expenses if interest rates start to rise over the short-term. In addition, all of the floating-rate-debt comes due either this year or 2015, so if interest rates do rise, the trust might have to refinance its borrowings at higher rates as well. This is something investors have to watch as higher borrowing costs can ultimately affect the trust’s distributions.

Outlook

In the near term, the operating environment for the Singapore hospitality market is expected to remain challenging. However, management views the longer term outlook for the tourism sector with positivity, as tourists continue to see Singapore as an attractive regional hub for business and as a leisure destination. If this pans out, it’d provide a strong tailwind for the trust. Village Hotel Changi and Regency House underwent asset enhancement works recently to “enable the properties to be positioned more competitively going forward”.

Far East Hospitality Trust’s units closed at S$0.83 on Friday. This gives rise to a price-to-book ratio of 0.84 based on the trust’s latest book value of S$0.976 per unit. The trust’s distribution yield stands at 6.3%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.