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Bullish On Ascott, Here’s Why…
Tradeable, Tradeable Ideas | 28 March 2014
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By: Lim Si Jie
Articles (169) Profile
A 5 minute read
  1. Ascott’s business model (master leases and contracts with minimum guaranteed income) provides income stability
  2. Ascott’s recent acquisition of Japanese rental housing property is a positive
  3. Sound fundamentals (comparatively lower P/E, higher EV, and BVS) can help underpin medium-to-long term valuation of Ascott

A Profile of the REIT
Ascott Residence Trust (Ascott REIT) is sponsored by The Ascott Ltd, which is a wholly owned subsidiary of CapitaLand (SGX: C31).

Ascott REIT is a serviced residence real estate investment trust. It invests in income-producing real estate and real estate-related assets.

Ascott REIT’s portfolio comprises approximately 7,427 apartment units in 68 properties across 25 cities and 12 countries. Ascott REIT’s serviced residences are operated under the Ascott, Citadines and Somerset brands, and are located in cities, such as Singapore, Beijing, Shanghai, Guangzhou, Tokyo, London, Paris and Berlin.

At these locations, the REIT’s exposure across different economic cycles will continue to enhance the stability of income as well as asset values. Income stability is further supported by properted which are on:

  1. master leases and
  2. services residence contracts with minimum guaranteed income

These contracts are predominantly from its Europe portfolio.

A Profile of S-REITs
REITs distribute at least 90 percent of their income to unit holders in return for tax concessions from the Singapore Government.

The majority of REITs listed on the SGX invest in property assets pertaining to hotels & lodging, industrial & office, residential, retail, and healthcare.

To the investor, REITs provide an opportunity to own a share of a large and diversified property portfolio without a large capital outlay.

The 26 REITs averaged a year to date total return gain of 1.4 percent, with a median of 1.1 percent. The average indicative dividend yield was 6.3 percent, with a median of 6.4 percent.

Property prices tend to rise in tandem with inflation. S-REITs are viewed as an investment vehicle to protect investors from the negative effects of inflation.

Ascott’s Business Model
Ascott Residence operates its serviced residences through 3 models:

  1. Master Leases
  2. Management contracts with Minimum Guarantee
  3. Management contracts.

59.2 percent of Ascott’s real estate assets are freehold assets. These assets contributed to approximately 45.7 percent of Ascott’s total revenue. Freehold assets ensure a continued source of revenue for the company in the future.

Recent Happenings At Ascott
Ascott REIT paid a dividend of $0.07 per share for the financial year (FY) 2013. Ascott REIT has been consistently paying out an average dividend of $0.071 for the past 3 years, demonstrating its healthy and strong finances.

Ascott Residence Trust (A68U.SI) recently announced the acquisition of a rental housing property in Fukuoka, Japan. The acquisition would cost about SG$78.4 million. Ascott’s management believes that the acquisition enables Ascott REIT to further expand its foot print in the stable Japanese market.

The average Japanese property prices are still 71 percent below their peak in 1991. However, land prices near major metropolitan areas are increasing.

Ascott REIT may have gotten themselves a growing asset at bargain prices. There is also a growing trend of renting of housing amongst the Japanese youths who are finding it harder to get housing loans.

Ascott can benefit in the short term from the rental market and also benefit from the capital gains of its asset in the long run.

Fundamentals

  • Return On Asset: 3.21 percent

The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. Ascott’s ROA of 3.21 percent is a good indication of its ability to convert the money into healthy net income. It also demonstrates Ascott’s consistent asset performance.

  • Valuation Analysis

  • Dividend Yield: 6.00 percent

Div yield is 0.3 percent behind the average sector dividend yield.

As compared to the STI index dividend yield (2.85 percent), Ascott REIT did perform well above the benchmark.

  • Current Ratio: 1.91

If Ascott was to declare bankruptcy at this moment, it would still have 90 percent of its current assets that can be distributed to its shareholders after paying off its current liabilities.

This is perhaps a clear indication that Ascott will have little to no issues with solvency. It is particularly important in the event of an unforeseen circumstance which would require them to pay the current portion of their debts.

  • P/E Ratio comparison

#Bullish
A close look at Ascott REIT’s financial report shows that Ascott REIT is undervalued. I believe that Ascott REIT is about 20 percent off its true valuation based on its discounted P/B and Enterprise Value. I am thus bullish about this stock in the medium to long term.

For greater gains, investors may want to stay at the side line to observe the share price to see if there will be further discount.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Ascott Residence Trust  1.310 +0.010 +0.77%   
Business: REIT invests in income-producing real estate assets which are used or predominantly used, as serviced residences, rental housing properties and other hospitality assets.

Insight: Apr-19, 1Q19 revenue increased 3% due to stronger ... Read More


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