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Frasers Hospitality Trust: The Struggle Continues

Frasers Hospitality Trust (SGX: ACV) continued to face challenges in the quarter ended 31 March. The hospitality trust that owns a portfolio of 15 properties saw its gross revenue and distribution per security (DPS) decline 7.6% and 11.5%, respectively.

Here are the key takeaway highlights.

Financial performance

Source: Frasers Hospitality Trust FY18/19 Q2 Earnings Press Release

As you can see, the numbers certainly don’t look good. All key operating numbers declined in the quarter, with DPS dropping by double digits.

The lower net property income was due to weaker performance in the trust’s Australia, Malaysia, and Japan portfolios. On top of that, the strong Singapore dollar negatively impacted the trust’s earnings and distributable income. Foreign currency fluctuations accounted for 53% and 40% of the decline in gross revenue and net property income, respectively.

With 75% of the trust’s net property income derived from outside of Singapore, foreign currency fluctuations could continue to haunt the trust going forward.

Portfolio statistics

The table below shows the performance of Frasers Hospitality Trust’s portfolio across the different countries it operates in.

Source: Frasers Hospitality Trust FY18/19 Q2 Earnings Presentation

Frasers Hospitality Trust faced challenges across its entire portfolio. The only bright spot here was its UK portfolio, which managed an 11.4% increase in gross operating profit. The UK portfolio was driven by the completion of renovation at Ibis Styles London Gloucester Road in February.

The Australian portfolio, which makes up the bulk of its revenue, declined 6.1% due to the challenging environment in Sydney.

Financial Position

On a more positive note, Frasers Hospitality Trust has a stable balance sheet with a gearing ratio of 34.1%, well below the 45% regulatory limit. Its cost of borrowing is also low at 2.6% and it has an interest cover of 4.8 times.

However, one thing to note is that around half of the trust’s debt is due this year. With interest rates up, the trust may have to refinance its maturing debt at higher rates, which could potentially push up the cost of financing and pressure distributable income in the upcoming quarters.

Looking forward

The supply glut in Sydney continues to put pressure on the trust’s performance in Australia. In addition, the hotel market in Melbourne is expected to remain under pressure with over 1,400 rooms to be added by 2020. Management has warned that if all projects come to fruition, future declines can be expected.

In the UK, new room supply and weaker corporate demand are also likely to put pressure on occupancy rates and revenue per available room (RevPAR) growth. Things don’t look good in Japan either, with the slowdown in the Chinese economy expected to weaken tourism in Japan, which is still highly dependent on Chinese visitors.

In Malaysia, a departure levy on all outbound travelers from June 2019 could undermine tourist arrivals.

One of the few highlights was in Singapore, where new supply is expected to taper off after 2019 and visitor arrivals are expected to grow in 2019.

Foolish takeaway

It was another difficult quarter for Frasers Hospitality Trust. The trust is facing stiff competition in various markets and continues to be impacted by the strong Singapore dollar. The outlook for the next few years in Australia also remains challenging.

At the time of writing, stapled securities of Frasers Hospitality Trust trade at S$0.74 apiece, which translates to a distribution yield of 5.9% and a price-to-book ratio of 0.91.

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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.