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Far East Hospitality Trust: Higher Distribution, but Its High Gearing Remain a Concern

Hospitality trusts are highly susceptible to the ebbs and flows of the markets in which they operate. Far East Hospitality Trust (SGX: Q5T) is no different, as illustrated by the trust’s highly erratic distributions over the past five years.

That being said, in 2018, the trust delivered respectable growth, with its distribution per stapled security (DPS) accelerating in the final quarter (Q4) of the year. Here are three of the most important takeaways from its earnings results.

No. 1: Growth in key operating financials

Far East Hospitality Trust, which owns nine hotels and four serviced residences in Singapore, grew its top line and DPS by 12.4% and 3.1%, respectively, in Q4. The improved performance was largely due to higher income from its existing portfolio and the revenue contribution from Oasia Hotel Downtown, which was acquired from its sponsor in January 2018. The table below summarises the key operating financials.

Source: Far East Hospitality Trust 2018 Q4 Earnings Press Release

No. 2: Key portfolio stats improved on the back of an upturn in Singapore’s hotel sector

All of the major operating metrics of its hotel portfolio improved on the back of higher visitor arrivals in Singapore.

Source: Far East Hospitality Trust 2018 Q4 Earnings Presentation

Average occupancy, average daily rate, and revenue per available room all improved from a year ago. Most notably, the average daily rate climbed 6.5% across its existing portfolio.

Far East Hospitality Trust benefitted from a 6.2% increase in international visitor arrivals in 2018 and just a 1.1% increase in hotel room supply. With the tourism board expecting visitor arrivals to grow by 1% to 4%, and hotel room supply growth estimated at 2.2% in 2019, the trust can continue to ride on the macroeconomic tailwinds this year.

Its serviced residences segment also recorded a 7.5% growth in revenue per available room, with its occupancy rate 6.1 percentage points higher at 84.3%.

No. 3: High gearing and valuation remain concerns

Looking beyond Far East’s improved operating performance, there appear to be some ongoing concerns for investors.

For one, Far East Hospitality Trust is highly geared. As of 31 December 2018, the trust had a gearing ratio of 40.1%, which is dangerously close to the 45% regulatory cap. With such a high gearing, it has little headroom to make debt-funded acquisitions that can drive growth.

Furthermore, the longer-term outlook, past 2019, remains uncertain. With the trust susceptible to macroeconomic conditions that are outside of its control, we could see earnings fluctuations should hotel room supply outpace visitor arrivals in the future. This phenomenon actually occurred between 2014 and 2017.

Investors should also note that at its current security price of S$0.635, Far East has a distribution yield of just 6.2%, which is average among REITs in Singapore. There are numerous REITs in Singapore that sport much higher yields and have the assurance of long-term growth and financial flexibility for acquisitions.

The Foolish bottom line

Despite the REIT’s positive performance in 2018 and the macroeconomic tailwinds set to assist it in 2019, I remain concerned about Far East Hospitality Trust’s balance sheet, valuation, and susceptibility to erratic earnings. With other REITs sporting higher yields and more visible long-term growth, I’d rather put my money elsewhere.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.