Is Frasers Hospitality Trust (SGX: ACV) Considered a Steal at Its Share Price of S$0.49?
Frasers Hospitality Trust (SGX: ACV) is the first global hotel and serviced residence trust to be listed on the Singapore stock exchange in 2014.
At the time of writing, Frasers Hospitality Trust’s share price (technically known as unit price for REITs and trusts) stands at S$0.49.
At that unit price, the trust looks undervalued since its price-to-book (PB) ratio is below 1x.
However, is Frasers Hospitality Trust cheap for a reason or is there an attractive investment opportunity for long-term investors?
Let’s explore using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Frasers Hospitality Trust provides investors exposure to one of the largest international hospitality portfolios.
Its portfolio consists of nine hotels and six serviced residences located in prime locations in nine main cities in Asia, Australia and Europe.
In Singapore, Frasers Hospitality Trust owns InterContinental Singapore and Fraser Suites Singapore.
Frasers Hospitality Trust is a stapled group comprising Frasers Hospitality Real Estate Investment Trust and Frasers Hospitality Business Trust.
A “stapled group” means that if an investor buys units in Frasers Hospitality Trust, the investor would own both the Frasers Hospitality Real Estate Investment Trust — a REIT — and Frasers Hospitality Business Trust — a business trust.
Frasers Hospitality Trust’s sponsor is Frasers Property Ltd (SGX: TQ5), a large Singapore-listed property developer and investor. As of 22 November 2019, Frasers Property held a 24% stake in Frasers Hospitality Trust.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
Frasers Hospitality Trust has a financial year that ends on 30 September each year.
Here, let’s understand more about how the trust has performed from FY2015 to FY2019. Do note that FY2015 spanned from 14 July 2014 (listing date) to 30 September 2015.
|FY2015||FY2016||FY2017||FY2018||FY2019||Compound Annual Growth Rate (CAGR) from FY2016 to FY2019|
|Gross Revenue |
|Net property income |
Excluding FY2015, Frasers Hospitality Trust’s gross revenue and NPI have increased at an annualised rate of 6.6% and 2.3%, respectively, over the years.
For FY2019, both gross revenue and NPI fell largely due to foreign exchange impact and weaker performances from the trust’s Australia and Malaysia portfolios.
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
Next, let’s find out how Frasers Hospitality Trust’s distribution per stapled security (DPS; similar to DPU for REITs) has performed.
|FY2015||FY2016||FY2017||FY2018||FY2019||CAGR from FY2016 to FY2019|
|DPS (Singapore cents)||7.56||5.23||5.05||4.76||4.41||-5.5%|
Over the past four years, Frasers Hospitality Trust’s DPS has been falling, which is not a good sign.
For the second quarter of FY2020, DPS fell further by 68% year-on-year to 0.3137 Singapore cents mainly on the back of lower travel demand from the COVID-19 pandemic.
3. Property Yield Check
Check for: Property yield of between 5% and 9%
Frasers Hospitality Trust had an NPI of S$111.7 million and a portfolio valuation of S$2.3 billion for FY2019, giving a property yield of 4.8%.
Frasers Hospitality Trust fails this criterion too.
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 March 2020, Frasers Hospitality Trust had a healthy gearing ratio of 36%, which is below my limit of 40%.
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
Frasers Hospitality Trust had an interest cover of 4.1 times as of end-March 2020, which doesn’t meet my criterion.
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Frasers Hospitality Trust’s Australia portfolio brings in the bulk of gross revenue for the trust. Therefore, we will focus on this geography for our portfolio occupancy rate check.
For the second quarter of FY2020, the Australia portfolio had an occupancy rate of 72.4%, down from 88.2% a year ago, due to the COVID-19 pandemic.
However, the latest rate was much higher than the occupancy rates of the property portfolios in other countries.
Australia latest portfolio’s occupancy rate of 72.4% is also not far off the average occupancy of hotels, resorts, and serviced apartments in the country of around 75% at end-2019 (latest data unavailable).
This somewhat shows the resiliency of Frasers Hospitality Trust’s Australia portfolio.
Considering the above, I’m giving this criterion a pass.
7. Rental Reversion Check
Check for: Positive rental reversions
Frasers Hospitality Trust’s properties are under master leases.
As of 30 September 2019, the weighted average lease expiry (excluding a master lease for Novotel Melbourne on Collins) was 14.3 years.
In my opinion, the rental reversion criterion is not applicable to Frasers Hospitality Trust since there’s no option to renew leases on an ongoing basis with the potential for rental reversion, unlike many other REITs.
Verdict: Not Applicable
8. Growth Prospects Check
One of the ways for Frasers Hospitality Trust to grow is through acquisitions, as seen below:
On that front, Frasers Hospitality Trust’s sponsor, as well as strategic partner TCC Group Investments, have granted the right of first refusal (ROFR) to a pipeline of hospitality assets for the trust to acquire.
The ROFR arrangement ensures that the sponsor and strategic partner offer the properties to Frasers Hospitality Trust for purchase consideration first before any other company.
With a strong balance sheet, Frasers Hospitality Trust has the potential to lever up to acquire those properties.
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Frasers Hospitality Trust’s current unit price of S$0.49, it has a PB ratio of 0.69x, which looks undervalued since it’s below 1x.
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Frasers Hospitality Trust’s current unit price of S$0.49 and based on FY2019 DPS, its distribution yield will be 9%.
However, the high yield is not sustainable with the headwinds from COVID-19.
In the first half of FY2020, DPS was 1.6438 Singapore cents. Frasers Hospitality Trust will be retaining a large portion of that and will be distributing only 0.3287 Singapore cents per stapled security for the period.
Annualising that amount, we arrive at FY2020 projected DPS of 0.6574 cents (assuming the retained portion is not given out in the current financial year).
At Frasers Hospitality Trust’s unit price of S$0.49, its projected distribution yield then falls to just 1.3%.
The Final Verdict
Frasers Hospitality Trust has a final score of 5/9.
After analysing the hospitality trust, in my opinion, Frasers Hospitality Trust looks cheap for a reason.
Despite its low PB ratio, I’m not attracted to the trust due to its falling DPS, low property yield, and unattractive distribution yield.
Therefore, I’ll skip investing in Frasers Hospitality Trust.
Would You Invest In Frasers Hospitality Trust?
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.