Frasers Hospitality Trust (FHT) announced its Q2 results last Friday evening with the Trust being the last few batch to announce amongst its other hospitality Reits peers like CDL Hospitality Trust, Ascott Reit and Far East Hospitality Trust.
The latter all provided an operational update for its Q1 results as more companies are adopting a semi-annual reporting formalities.
Here are the 5 Things you should look out for in FHT’s recent results announcement:
1.) FHT is a Stapled Trust
Most hospitality Reits were formed as a stapled trust.
Being a stapled trust, FHT comprises of Fraser Hospitality Reit (FH-Reit) and Fraser Hospitality Business Trust (FH-BT).
Under normal circumstances, most investors do not notice the differences as they continue to receive payout from the hospitality trusts as a consolidated stapled.
What really happens behind the scene is that FH-Reit will have a mandate to distribute at least 90% of its distributional income to investors while FH-BT will have a discretion of how much distributional income they want to pay or retain.
2.) Operating Model: Master Leases + Management Contract
Different hospitality trusts have different operating models.
Fellow Blogger Chin Wai did a good job in summarising the different business models for all the different hospitality Reits listed in SGX. You can read them here.
FHT’s operating model for its properties are under the Master Leases (14) and Management Contract (1).
Master Leases are the easiest to operate as being the owner you lease the property out as a whole to the operator. In return, you get a fixed rental fee but little returns from the variable as most of the risks (and rewards) are likely to be kept with the operator. Most hospitality trusts under this operating models have lower downside but also limited upside during good times.
Under management contract, you receive management fees in the form of room, carpark and F&B revenue composition. When times are good and room per key (Rpk) or revenue per available room (RevPAR) increases, you get to enjoy plenty of upside from this model. Vice versa, when times are bad like what happened during Covid, it is likely the downside is higher.
The presentation is separated as per different operating model composition.
3.) Systematic Risks Gave Diversification A Punch On Its Face
The portfolio of FHT comprises of a total of 15 properties – which makes up of 9 hotels and 6 services apartment, diversified across many different countries including Singapore, Malaysia, Japan, Australia, UK and Germany.
Together, it forms a total of 3,071 hotel rooms and 842 service residences units.
Great diversification across regions.
One Covid-19 pandemic.
Diversification doesn’t help in this case when you have systematic risk like Covid-19 taking place.
Every businesses suffer. Every hotels demand around the globe is halted.
Master Lease rental revenue drops by as much as 44% in Q2FY20 when compared to last year while the other room and F&B revenue under the management contract drops by 33%.
Across all regions, operating revenue drops between 13% to 35%, with Singapore and Malaysia being hit the most.
In Singapore alone, RevPAR has dropped to $103, more than halved of what was reported just two months ago in January (RevPAR $242).
4.) Distributional Payout at 20% (Retention 80%)
FHT took a playbook from most other Reits that have reported earlier by reducing its distributional payout for their semi-annual payout.
On 23rd Jan2020, FHT announced that income available for distribution to Stapled Shareholders based on Q1FY20 amounting to $25.5m (1.33 cents/share).
Based on Q2FY20 results, income available for distribution amounted to $6.1m (0.31 cents/share).
Cumulatively, they were supposed to have a total of $31.6m (1.64 cents/share) available for distribution for their semi-annual payout.
To conserve cash during this period, FHT will distribute $6.3m (payout 20%) and make retention on the rest of the 80% for working capital purpose.
5.) Gearing at 36% and No Maturity Loans Due Until FY2022
FHT has no maturity loans due until FY2022.
Effective cost of borrowing is at 2.4%.
72.7% of those borrowings are at fixed rates.
I’m not sure if that’s a good thing these days because most companies can actually refinance at a much lower rates these days when nations across all regions are slashing their interests close to zero.
Still, with a 4.1 interest coverage ratio, no maturity loans due and 80% retention of distributional income, I think they’ll do reasonably okay during this period.
Thanks for reading.
If you like our articles, you may follow our Facebook Page here