Frasers Hospitality Trust expects properties in countries with domestic travel market to recover faster

FRASERS Hospitality Trust (FHT) is banking on its properties in countries with a predominant domestic travel market to recover faster than the others.

This includes properties in Australia, Japan and the United Kingdom, said FHT, a stapled group comprising Frasers Hospitality Real Estate Investment Trust and Frasers Hospitality Business Trust.

"While demand for accommodation is likely to be constrained by health concerns and the level of post-Covid-19 austerity, pent-up travel demand seems most evident within the leisure segment," said FHT in response to shareholders' questions ahead of its annual general meeting to be held on Wednesday.

It expects corporate travel demand to be the next segment to recover while large-scale Mice (meetings, incentives, conventions and exhibitions) events, will take longer to return.

On potential acquisition plans, FHT said there have been few hotel transactions as sellers who had put their assets on the market before the pandemic have now put their plans on hold.

Still, the investment team will continue to keep an eye out for good-quality distressed assets coming onto the market, said FHT.

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"Any opportunities, including M&As, that we pursue will have to be compelling and strategic, with investment decisions weighed carefully against funding options available, market conditions for equity fund raising and the cost of equity," it said.

On rebalancing its portfolio, FHT noted that the pandemic may not "present the right time" to get the best price possible for any asset sale.

In response to queries on overcoming the challenges posed by the pandemic, FHT said that it has, in collaboration with its hotel and serviced residence operators, proactively taken "painful but necessary measures" to address the operating and financial impact of the pandemic.

This includes cost-containment measures to reduce operating expenses and conserve cash. Discretionary expenditure and non-essential capital expenditure have also been suspended, while support measures by various governments such as property tax rebates and wage subsidies have been pursued.

To sustain revenue, FHT had secured quarantine businesses in Singapore, Sydney and Melbourne. Its two hotels Sofitel Sydney Wentworth and Novotel Melbourne on Collins continue to pull in revenue from the quarantine business.

FHT added that its other properties are also seeking out revenue through domestic travel or staycation business. Some of these properties have launched new offerings to meet the evolving needs of the local market; others are exploring new ways to utilise existing space to drive revenue.

FHT also pointed out that while recovery is underway as vaccines roll out, recovery is expected to take some time due to production challenges and complex distribution processes.

In response to queries about factors driving down the fair valuations of FHT's investment properties, FHT said that the valuations of all country portfolios in local currency terms declined year on year (yoy) as the impact of the pandemic and the uncertainty of recovery have affected the short- to medium-term cash flow, and consequently, the values of the properties.

This is despite capitalisation rates and discount rates remaining largely unchanged from the previous financial year.

As at Sept 30, 2020, FHT's investment portfolio was valued at S$2.25 billion by independent valuers, down 3.5 per cent from S$2.33 billion a year ago.

But compared to the previous financial year, all functional currencies appreciated against the Singapore dollar in FY2020, leading to a smaller yoy decline in total portfolio valuation of 3.5 per cent to S$2.25 billion.

FHT added that it adopts an active capital management strategy and seeks to diversify its sources of funding to optimise its capital structure. It also spreads out debt maturity and hedges its interest rate exposure.

There is thus no debt maturing until FY2022 and in any one year, no more than 30 per cent of its total debt is due. To manage interest rate risk, about 75 per cent of total debt are on fixed interest rates. It has also been able to secure lower floating rates on the balance 25 per cent total debt to reduce its effective cost of borrowing to 2.3 per cent, down from 2.5 per cent a year ago. As at Sept 30, 2020, FHT's gearing stood at 37.7 per cent.

"We remain in compliance with our debt covenants and have adequate reserves to fulfil our obligations," said FHT, adding that 96.3 per cent of its total assets remain unencumbered.

With the leverage limit for S-Reits being raised from 45 per cent to 50 per cent, FHT said that it continues to have ample debt headroom. 

Stapled securities of FHT closed flat at 53.5 Singapore cents on Tuesday.