7 Things You Must Know About Ascott Residence Trust Before You Invest

There are many options of accommodation for travellers according to his comfort level and budget. A solo backpacker would most likely stay in youth hostels or dormitory which cost lower and provide a communal setting where he could interact with other travellers. A married couple or family with young kids would prefer hotels or resorts for a better comfort level that comes at a premium. If it was a vacation involving the extended family, a serviced residence would be suitable as it could house a larger group under one roof that promotes family bonding, where meals preparation is also possible.

Out of the many hospitality Reit available on the local stock market, there is one Reit that owns serviced residence as its key property assets: The Ascott Residence Trust.

Here are several points that could help you decide if Ascott Reit is a worthy investment.

1- Stock Information

Ticker Symbol: A68U

Market Capitalisation: S$2.54 billion

Sector: Real Estate Investment Trust

2- Ascott Reit’s Assets

Ascott Reit owns a large portfolio of 76 serviced residences found in 14 countries, 38 cities that are worth a total of $5.3 billion. In total, there are 11,861 apartment units. The diagram below shows an overview of its assets spread across the globe.

Source: Ascott Reit Lunch Seminar Presentation slides at Phillip Capital

 

Serviced residences are essentially fully furnished apartments that cater for both short and long-term stay. It comes with kitchen facilities and dedicated living and dining area, suitable for large group family vacation, or expatriates posted overseas for medium-term work assignments. They are different from hotels in a few areas:

• A variable lease term that ranges from less than 1 week to more than a year while hotels operate on short-term accommodation
• A cost structure with lower staff-to-room ratio with limited services provided whereas hotels have higher staff-to-room ratio providing full range of hospitality services
• Occupancy rate largely is driven by long-term economic activities and GDP growth while hotels’ seasonality is impacted by tourism industry

3 – Key Operating Statistics

With a broad overview of Ascott Reit’s properties, let’s take a look at their key operating statistics based on Q2 results.

Its revenue for Q2 FY17 increased by 4% compared to Q2 FY16 and Gross Profit risen by 2%. As for Revenue per Available Unit (REVPAU), a key indicator used to measure the income-generating ability of hospitality assets, it is 3% higher year-on-year.

Source: Ascott Reit Q2 FY17 Results Presentation

Unitholders distribution increased by 34% in Q2 FY17 mainly due to realised foreign exchange gain arising from the payment of foreign currency loan and improved operational performance. Adjusted Distribution per Unit, taking into account Rights issue in April-2017 to acquire Ascott Orchard Singapore and properties in Germany and one-off items increased by 8%.

Source: Ascott Reit Q2 FY17 Results Presentation

 

4 – Key Strength

Geographical and Guest Base Diversification

With 75 properties found in 38 cities across developed and emerging economies in Asia Pacific, Europe and US, it suffices to say that Ascott Reit’s properties are vastly diversified globally across geographical regions. In fact, no single country constitutes more than 14.6% of its asset base. A well-spread asset base offers good diversification and reduces Ascott Reit’s revenue dependence on any particular market.

Its guest base comprises a mix of business travellers, expatriate families, corporate clients and government bodies that also provides relative stability to its revenue.

Source: Ascott Reit Q2 FY17 Results Presentation

 

Robust Business Model

Ascott Reit’s properties are managed under 3 different contract types that provide both stable and growing income:

• Properties under master lease where master lessees pay fixed rental per annum
• Properties under management contracts with minimum income guarantee
• Properties under management contract by third-party operator for a fee with no guaranteed rental

Ascott Reit has positioned its properties under different management contract types according to the geographical locations and level of economic development. For example, 60% of its gross profit in Q2 FY17 came from Management contract without guaranteed rental which can be found in economies growing well such as Vietnam, China and USA to capture potential rental growth. 40% of gross profit was contributed by master leases and contracts with minimum income found in matured economies mainly in Europe. The unique business model cushions Ascott Reit’s performance during the market downturn and enables it to capture growth during economic expansion.

Source: Ascott Reit Lunch Seminar Presentation slides at Phillip Capital

 

Strong Sponsor

Ascott Reit has a strong sponsor in the form of Ascott Limited, a wholly owned subsidiary of CapitaLand Limited. It is one of the leading international serviced residence owner-operator with over 500 properties found in 124 cities across 31 countries. This ensures a ready pipeline of assets for Ascott Reit’s acquisition for growth, provided they are executed well with yield accretive assets.

 

5 – Risks

Risks Associated with Capital Structure

There are 2 risks here. Firstly, while Ascott Reit does not have an excessively high gearing at 32.4% as at end-Jun, it is still susceptible to rising interest that will result in higher interest payments and reduce distribution per unit, all else being equal. Secondly, negative movement of foreign currencies in which Ascott Reit earns rental income would also impact its income available for distribution.

Global Economy Slowdown

As mentioned earlier, service residences’ occupancy largely depends on business travellers and expatriate families, whose medium or long-term stay, are undoubtedly subject to impact from economic development and business activities. Should there be a wide-spread global economic slowdown that affects Eurozone, Asia Pacific and the US, Ascott Reit will be heavily impacted. Its diversity can work against it in such a case.

Manager’s Penchant for Acquisition

This is a common issue among the local REITs landscape – propensity to acquire properties. Ascott Reit has been actively acquiring assets worth $4.6 billion to fuel its growth since listing. While it is not a risk per se, implemented well will see the Reit grow its distribution steadily; implemented badly will cause investors to repay more than his dividends via a rights issue. Hence this is an area where investors need to monitor closely.

6 – Valuation and Major Shareholding

Ascott Reit currently trades at a Price to Book ratio of 0.99 and a trailing-twelve-months dividend yield of 6.59% based on a closing price of $1.175.

Capitaland has an effective ownership of 44.16% of all outstanding units, which in turn means that Temasek Holdings has a 45.25% ownership.

7 – Financials

Ascott Reit’s latest financial results can be found in the link.

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The information provided is for general information purposes only and is not intended to be an investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong does not own any companies mentioned above.

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