One of the most critical aspects of a REIT or property trust is the debt profile of the trust. Prudent debt management is an essential characteristic that can determine the long-term profitability of a trust.
In this article, I will take a deep dive into the debt profile of Fraser’s Hospitality Trust.
As a quick introduction, Frasers Hospitality Trust (SGX: ACV), or FHT for short, is Singapore’s first and largest hospitality focused trust that has properties located both in and out of Singapore. The trust owns a total of 15 properties, which includes nine hotels and six serviced residences.
The gearing ratio is the ratio of debt with the value of the assets of the trust. In Singapore, REITs are mandated to have a gearing ratio of not more than 45%.
As of 31 March 2018, FHT had assets worth S$2,537 million and its total borrowings stood at S$838.9 million. From that, we can calculate that it has a gearing ratio of 33.1%. This is a fair distance below the 45% limit set by the Monetary Authority of Singapore.
However, the trust has raised $100 million through a fixed rate perpetual securities issuance last year. In accounting terms, perpetual securities are denoted as equity as the principle does not have to be paid back. Just like taking a loan, interest on these notes is payable each year.
Debt maturity profile
In its latest earnings presentation, FHT gave a snapshot of its debt maturity profile.
Source: Frasers Hospitality Trust Second Quarter Results Presentation
Most of FHT’s debt is due by 2019, with S$118.7 million due this year. Its weighted-average-years-to-maturity was only 2.68 years. With interest rates likely to rise this year, I expect that the cost of borrowing will increase when FHT refinances its loans.
Effective cost of borrowing and interest cover
FHT has an effective cost of borrowing of 2.7%. However, as mentioned earlier, the fact that much of FHT’s debt is repayable in the next one or two years, it will be interesting to see how the trust manages its costs of borrowing in the future.
FHT currently has a reasonably safe interest cover ratio of 5.5 times. This means that it has headroom to deal with any interest rate fluctuations or to take on more debt in the future. However, once again, we will need to reassess the situation when FHT refinances its debt that is expiring in the next two years.
The Foolish bottom line
In conclusion, FHT has a gearing ratio that is well within regulatory limits. This means that there is headroom for yield-accretive acquisitions in the future. With FHT’s recent history of acquiring new properties aggressively, I believe that management intends to make use of this to further grow the portfolio and increase distributions in the future. However, the growth is also dependent on FHT’s ability to keep borrowing costs low when they refinance their loans.
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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 Jeremy Chia doesn’t own shares in any companies mentioned.