Frasers Hospitality Trust's DPU could slip 13% for FY2019/2020

Sluggish corporate demand at its Sydney properties is weighing in on near-term performance.

Frasers Hospitality Trust’s (FHT) distribution per unit (DPU) for FY2019/2020 may drop by 11-13% on the back of weaker-than-expected Q2 earnings and expected declines in revenue per average room (RevPAR) in the Sydney portfolio, according to a report by DBS Equity Research.

In Q2, FHT’s net property income (NPI) slipped 9.1% YoY to $25.21m in Q2 from $27.75m in 2018. Revenue also dropped 7.6% YoY from $37.49m to $34.62m. Its earnings were hit by weaker performance of its Australia, Malaysia and Japan portfolios, as well as the foreign exchange impact on all functional currencies.

Also read: Frasers Hospitality Trust's NPI fell 9.1% to $25.21m in Q2

In an effort to turn things around, FHT is reportedly considering selling its Sofitel Wentworth property in Sydney above its current book value, whilst also possessing hotels that can realise value in the medium term, through rebranding or redevelopment. Sofitel Sydney Wentworth and Frasers Suites Sydney were impacted by a more competitive market due to an increase in room supply during the quarter.

According to DBS analyst Mervin Song, these potential value add actions should also provide support to FHT’s share price as it navigates near-term challenges, particularly in Australia.

“We understand demand from Australian domestic corporates has been weak and an expected increase in supply could potentially result in continued soft RevPAR performance for FHT’s Sydney properties. Partially offsetting this is a stronger contribution from its Novotel Melbourne property as it benefits from repricing and more active management of the room inventory,” he noted. “However, in the medium term, we continue to expect FHT’s Sydney properties to make a strong contribution as the rejuvenation of the Darling Harbour precinct should support demand for its properties there.”

A separate report by Maybank Kim Eng (Maybank KE) also noted that given the supply-side headwings in Australia, this could prompt FHT to recycle a third of its assets under management (AUM) into Europe with stronger growth fundamentals, as they target expansion opportunities.

“A successful transaction at a 4-4.5% cap rate for the Sofitel Wentworth Sydney could result in a $110-150m gain, based on our estimates to fund other deals,” Maybank KE’s analyst Chua Su Tye noted.

DBS Equity Research further added that with new room supply expected to ease from 2018 onwards, FHT’s NPI, which sources almost a quarter of its earnings from Singapore, could benefit from a recovery in RevPar over the next two to three years.

Song however warned that in the near term, FHT’s Singapore operations may be impacted by heightened competition in the serviced residence sector as residential units can be rented out for a minimum of three months versus six months previously, and new hotels nearby Intercontinental Singapore are also posing a threat to the business.