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A Closer Look Into Ascott Residence Trust
Corporate Digest | 23 May 2014
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By: Jonathan Khoh
Articles (26) Profile

Ascott Residence Trust (ART), well known for its high gearing ratios and its majority of assets held in foreign markets, might seem a tad too risky for a risk adverse investor like myself.

Yes, I am not the usual adrenaline-seeking risk taker, nor extremely courageous when jumping into large-scale investments. However, being someone who makes informed investment decisions, there might be more to ART than meets the eye.

As a hospitality REIT, one might be under the impression that ART’s revenue may appear to be highly volatile and sensitive to tourism numbers and economic growth.

However, in recent years despite uncertainty and regulations constricting growth in the local property sector, ART’s Rental Yield has been on the rise.

    ART’s performance could be underpinned by its unique:

  • Geographical diversification, and,
  • Its extended stay business structure

Geographical Diversification
Unlike its peers, ART has a massive global presence, spanning across 12 countries and 32 cities specifically in Europe and Asia, with 9,082 units amounting to a whooping $3.7 billion.

Extended-Stay Business Model
A serviced residence REIT, ART’s guest base comprises mainly corporate travellers which are generally more stable than the seasonal nature of tourism travel.

Furthermore, ART’s property income stability is also supported by master leases and serviced residence management contracts with minimum guaranteed income which makes up 51 percent of its revenue.

Therefore, with 51 percent of ART’s revenue made up by master leases and management contracts with minimum guaranteed income for an average remaining tenure of 5 years, volatility is smoother out as observed in the gradual increase in Distribution per Unit(DPU) and rental yield.

2009

2010

2011

2012

2013

DPU

7.32

7.54

8.53

8.76

8.4

 

 
 
Valuation
ART is trading at $1.20, approximately a 12 percent discount to its Net Asset Value (NAV) relatively less expensive than its hospitality peers.

 

Ascott Reit

CDL HTrust

Far East HTrust

OUE HTrust

Price/NAV - Adjusted

0.8758

1.0567

0.8967

0.9614

 
Debt
Despite being significantly cheaper than its hospitality peers, Ascott’s Debt ratios are notably higher than its competitors.

With a net debt to equity ratio of 47 percent and an interest cover of 6.6 times, this could possibly explain its cheap valuation. In spite of ART’s credit rating Baa3 (investment grade), such debt figures could still prove alarming.

Ascott Reit

CDLHTrust

Far EastHTrust

OUE HTrust

Net Debt To Equity

0.474

0.388

0.429

0.43

Interest Coverage

6.588

9.592

10.108

8.96

 
However, a further analysis of ART’s debt structure may showcase a more optimistic scenario.

What these ratios did not reflect was that 80 percent of its debt is comprised of fixed rate debt borrowed at an average rate of just three percent!

Furthermore, the majority of its debt will mature in 2018. Moving forward, ART wouldn’t be that badly affected in light of the recent rise in interest rates at least till 2018.

 

 

    Investment Merits

  • ART is backed by strong interest from majority shareholders therefore they are  unlikely to be at the mercy of the banks or capital markets during times of recession.
  • Name of Substantial Unitholder

    Deemed Interest

     No. of Units

    %

    CapitaLand Limited

    692,618,340

    45.42

    Temasek Holdings

    715,584,558

    46.92

    AIAGroup Limited

    76,407,600

    5.01

  • First Right of refusal of the future sale of Ascott’s Properties.
  • Geographical Diversification, ensures stability in revenue despite uncertainly and limited upside of Singapore’s property sector
  • Extended-Stay Business Model.
  • Healthy debt structure, 80 percent fixed rate at low interest rates, with majority maturing in or after 2018.
  • Cheap Valuation, 12 percent discount to its net asset value.
  • ART has been consistently distributing 100 percent of its distributable income.
  • Attractive dividend yield of, 7 percent, higher than most of its peers.
  • Ascott Reit

    CDLHTrust

    Far EastHTrust

    OUE HTrust

    Dividend Yield - Adjusted

    6.977%

    6.349%

    6.397%

    3.27%

 

 

    Investment Risks

  • Global decline in tourism, due to epidemic (MERS), or economic slowdown.
  • In light of rising interest rates,ART may have to refinance their debt at higher interest rates.

SI Research Takeaway
A closer look at ART’s fundamentals revealed a healthier debt position of the REIT. At an attractive yield of 7 percent, and a 12 percent discount to its net asset value, ART could prove to be a good investment for exposure to global hospitality industry.

Alas, let’s not forget that ART is after all a subsidiary of our Real estate giant CapitaLand. 

Driven by passion in investments, Jonathan’s research emphasizes in incorporating critical thinking with value and income investing surrounding companies listed in Singapore. Well trained in banking and finance, Jonathan has intern experience at various industry players including GIC Pte Ltd.

Please click here for more information about this author.

Ascott Residence Trust  1.370 -- --   
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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