I was scanning through the various REITs and got interested in Frasers Hospitality Trust (FHT), and decided to read up more about it. After looking through FHT's financial statements announcement and presentation slides dated 23 Jan 2020, I managed to gain some knowledge about FHT and I understand them within the following framework that I have in mind.
Risk - Is the REIT over-leveraged? Would it face issues when interest rates increase? With these questions in mind, I looked at the following indicators which I think would help me understand the situation better.
- Gearing: FHT's gearing was at 35.5%, and this is below the leverage limit of 45% imposed on REITs by the Monetary Authority of Singapore (MAS).
- Cost of loan: According to FHT, their effective cost of borrowing was 2.4%.
- Current Ratio: Based on the data from SGX, the Current Ratio for FHT is 1.53. From FHT's presentation slides, their interest cover was 5.7 times.
Value - Is it worthwhile to buy this REIT? Is there potential for its income and value to grow over time? To answer these questions that I have, I tried to look for the following indicators.
- Net Asset Value (NAV): FHT's NAV per share was $0.7233. The price of FHT shares at the end of yesterday is $0.65, a 10.1% discount from its NAV.
- Occupancy rates: I looked up Singapore Tourism Board's hotel statistics, and data shows that the average occupancy rate for hotels in Singapore was 87.1% in 2019. While this figure is not comparable to the occupancy rates cited in FHT's presentation slides (which presented one quarter's worth of data and also included properties outside of Singapore), I think this would give me a rough benchmark to understand the performance of FHT's properties. FHT's Singapore properties' occupancy rate was 86.7% for the period from 1 Oct to 31 Dec 2019. The occupancy rates for FHT's properties in Australia and the UK were higher than 87.1%, whereas properties in Malaysia and Japan were lower.
- Property lease: Amongst FHT's properties, only 4 out of its 15 properties are freehold.
Efficiency - Is it using its resources efficiently and creating value? I'm not sure whether these indicators below are suitable for answering this question, but these are what I think would give me a rough sensing.
- Return on Equity (ROE): Based on data from SGX, FHT's ROE is 3.116, which I realised is lower than the ROEs of Far East Hospitality Trust (FEHT) and CDL Hospitality Trusts (CDL HTrust).
- Return on Assets (ROA): Similarly from SGX's data, FHT's ROA is 2.149, which is also lower than FEHT and CDL HTrust.
As I'm not trained in accounting, I do find it a challenge to understand the various financial information and how to analyse the performance of a REIT. Hope someone can correct me if any of the above information or understanding is not right. In any case, after going through the above thinking process, I don't think I would buy this REIT. My main concern is that I'm looking for something to keep for the long-term, and I'm not sure how the decaying property leases of FHT's properties would impact its value in the future.