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1 Billion-Dollar REIT That Has A Distribution Yield Of Over 7% Now: Frasers Hospitality Trust

Real estate investment trusts, or REITs, are popular investment choices in the Singapore stock market. That’s because REITs tend to have high dividend yields (technically, a REIT’s dividend is known as a distribution – but let’s not split hairs here!) due to their need to distribute up to 90% of their taxable income to unitholders in order to enjoy tax transparency.

In this article, I want to discuss Frasers Hospitality Trust (SGX: ACV), a REIT with a market capitalisation of over S$1 billion and a distribution yield of more than 7%.

Source: SGX Stock Facts

Frasers Hospitality Trust is a stapled trust that comprises a real estate investment trust and a business trust. It focuses mainly on hotels and serviced residences around the world. Right now, its portfolio consists of 15 properties located across nine cities in Asia, Australia, and Europe

For the quarter ended 30 June 2018, the trust’s gross revenue declined by 1.8% year-on-year to S$38.2 million while its net property income (NPI) fell by 2.8% to S$28.5 million. The declines were primarily due to challenges in Australia and Kuala Lumpur. For the former, Frasers Hospitality Trust experienced softer corporate demand; for the latter, there were “consequential pullbacks in business and government spending leading up to and after the Malaysia general election.”

Ultimately, Frasers Hospitality Trust’s distribution per stapled security (DPS) came in at 1.1226 Singapore cents, 9.3% lower than a year ago. As at 30 June 2018, the trust had a gearing ratio of 34.0%, which is a safe distance from the regulatory gearing ceiling of 45%.

Singapore and Australia accounted for 35% and 33% of the trust’s portfolio value, respectively, as of 30 June 2018. In its latest earnings update, here’s what Frasers Hospitality Trust shared about the outlook for its business in the two key markets:

“Singapore Tourism Board (STB) reported a yoy growth of 6.9% in visitor arrivals for the first five months of 2018. China and Indonesia were the top source markets for tourism, accounting for 35.3% of total visitor arrivals. In the near term, hotel demand is expected to remain strong due to continued arrivals growth while limited hotel supply should reduce supply-side pressure. Hotel trading performance is anticipated to pick up in 2H2018. Increased marketing efforts by STB and the positive outlook in Asia-Pacific tourism should continue to drive visitor arrivals growth.

Tourism Australia reported a yoy increase in international arrivals of 6.1% for the first five months of 2018, with Chinese visitors growing by 10.5%. A relatively large number of new rooms is anticipated to enter the Sydney market over the next three years but continued strong demand is expected to offset the supply increase. Stable occupancy and anticipated increases in ADR are likely to continue to support RevPAR growth in the city. The Melbourne hotel market, on the other hand, is expected to stay muted. Room rate growth has been hard to come by and with a glut of new supply in 2018 and 2019, this is anticipated to remain the case for some time.”

As for Malaysia, one of Frasers Hospitality Trust’s troubled markets in the reporting quarter, here’s what it had to say regarding its prospects in the market:

“Despite tourist arrivals declining 3.0% yoy to 25.9 million, tourist receipts still inched up 0.1% to RM82.2 billion last year. Tourism Malaysia targets to achieve 33.1 million tourist arrivals and RM134 billion in tourism receipts for 2018. It reported a yoy decline of 3.4% in tourist arrivals for January to April 2018. In Kuala Lumpur, hotel room rates are expected to remain stagnant in the near future, in view of the new room supply that has entered the market since last year. This would deter the existing hotels from raising their rates in order to stay competitive.”

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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 Lawrence Nga doesn’t own shares in any companies mentioned.