Ascott Residence Trust‘s (SGX: HMN) share price (technically known as unit price for REITs and stapled groups) has fallen by around 7%, from S$1.35 on 23 January 2020 to S$1.26 currently.
The sudden decline is most likely due to the COVID-19 (official name for the novel coronavirus) infection that has rocked the world thus far.
Does the short-term decline in the unit price of Ascott Residence Trust present an opportunity for long-term investors?
Let’s explore using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Let’s first take a look at what Ascott Residence Trust’s business is about before analysing its business.
Ascott Residence Trust is a stapled group and is the largest hospitality trust in the Asia-Pacific region with an asset value of S$7.4 billion, as of 31 December 2019.
What “stapled group” means is that if an investor were to buy units in Ascott Residence Trust, he or she would own both Ascott Real Estate Investment Trust (Ascott REIT) and Ascott Business Trust (Ascott BT) as a single investment.
Ascott Residence Trust was listed in March 2006 and invests mainly in serviced residences, hotels, rental housing properties, and other hospitality assets without any restrictions to geography.
Right now, Ascott Residence Trust’s portfolio comprises 87 properties in 39 cities across 15 countries. The properties are mostly operated under the brands of Ascott The Residence, Somerset, Quest, and Citadines.
(Note: On 31 December 2019, Ascott Residence Trust completed the merger with Ascendas Hospitality Trust.)
In Singapore, Ascott Residence Trust owns:
- Ascott Orchard Singapore
- Citadines Mount Sophia
- Somerset Liang Court
- Park Hotel Clarke Quay
- lyf one-north Singapore (under development)
Ascott Residence Trust’s sponsor is The Ascott Limited, whose parent company is CapitaLand Limited (SGX: C31). The Ascott Limited owns around 40% of Ascott Residence Trust (held through CapitaLand).
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
First up, let’s check on Ascott Residence Trust’s revenue and gross profit (akin to NPI for REITs).
| 2015 | 2016 | 2017 | 2018 | 2019 | Compound Annual Growth Rate (CAGR) | |
|---|---|---|---|---|---|---|
| Revenue (S$' million) | 421.1 | 475.6 | 496.3 | 514.3 | 515.0 | 5.2% |
| Gross profit (S$' million) | 204.6 | 222.4 | 226.9 | 239.4 | 252.6 | 5.4% |
Overall, the metrics have climbed by around 5% each per annum.
Verdict: Pass
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
Next, we will look at Ascott Residence Trust’s historical growth of distribution per stapled security (DPS; similar to DPU for REITs).
| 2015 | 2016 | 2017 | 2018 | 2019 | CAGR | |
|---|---|---|---|---|---|---|
| DPS (Singapore cents) | 7.99 | 8.27 | 7.09 | 7.16 | 7.61 | -1.2% |
Disappointingly, DPS has been coming down in the past five years.
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
In 2019, Ascott Residence Trust had a property yield of 4.1%, given its gross profit of S$252.6 million and investment properties value of S$6.1 billion. The figure is below my range of 5% to 9%.
Verdict: Fail
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, Ascott Residence Trust had a gearing ratio of 33.6%, which is below my threshold of 40%.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
Ascott Residence Trust passes this test as well since its interest coverage ratio is above 5x.
Verdict: Pass
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Instead of looking at portfolio occupancy rate alone for a hospitality REIT, it would be better to analyse its revenue per available unit (RevPAU), which is used to measure hotel performance.
RevPAU is calculated by multiplying a hotel’s average daily room rate (average room rental per day) by its occupancy rate.
Here’s a look at Ascott Residence Trust’s latest RevPAU figures:
The following table shows Ascott Residence Trust’s RevPAU performance over the longer term:
| 2015 | 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|---|
| RevPAU (S$) | 133 | 140 | 144 | 151 | 152 |
(Note: RevPAU does not include statistics of the trust’s rental housing properties and properties on master leases.)
It’s great to see that Ascott Residence Trust’s RevPAU has been increasing consistently over the years.
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
Of Ascott Residence Trust’s gross profit, around 25% of them come from master leases, 13% come from management contracts with minimum guaranteed income, while 62% are under management contracts without guaranteed income.
Master lessees pay fixed net rental to Ascott REIT, with the exception of Ascott Orchard Singapore which pays an additional variable component. The master leases in Europe are subject to annual rental revisions while the master leases in Australia are subject to yearly adjustments until the next market review.
Management contracts are contracts between Ascott REIT and the operators which provide property management services to Ascott REIT. Unlike the properties under master lease arrangements, guests will lease the units directly from Ascott REIT.
Since the majority of the trust’s gross profit is under management contracts without guaranteed income, the trust’s income stream is mainly dependent on the RevPAU of the properties under such management arrangements. As seen under point 6, RevPAU from management contracts (shown under “Growth Income”) showed a year-on-year fall.
Verdict: Fail
8. Growth Prospects Check
In the short-term, Ascott Residence Trust is likely to be affected by the COVID-19 outbreak since it will hit travel demand. However, the impact might be minimised.
In its latest earnings release, the trust explained:
“Concerns over the developing Novel Coronavirus situation will impact the demand for travel. While the extent of the impact is uncertain, ART’s [Ascott Residence Trust’s] geographically diversified presence and mix of stable and growth income streams are expected to mitigate the impact.
For the quarter ended 31 December 2019, master leases and management contracts with minimum guaranteed income (stable income) contributed 38% of ART’s gross profit, offering downside protection and income resilience.
Post Combination [with reference to merger with Ascendas Hospitality Trust], ART’s proportion of stable income is expected to increase with the addition of more properties on master leases. Furthermore, ART’s properties, predominantly serviced residences focused on business travellers, have a longer average length of stay, offering stability to the portfolio”
Over the longer term, given Ascott Residence Trust’s low gearing ratio of around 34%, there is also room for it to grow inorganically by acquiring assets from its sponsor.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Ascott Residence Trust’s unit price of S$1.26, it is valued at a PB ratio of 1.0x, which is a fair value to pay.
Verdict: Pass
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Ascott Residence Trust’s unit price of S$1.26, it has a distribution yield of 6%, which is above 5%.
Verdict: Pass
The Final Verdict
Ascott Residence Trust has a final score of 7/10.
Overall, I like Ascott Residence Trust for its quality assets and exposure to the world’s business travel demand. Its combination with Ascendas Hospitality Trust is also a positive development and could propel Ascott Residence Trust to the next level.
Having said that, I’m mindful of Ascott Residence Trust’s falling DPS and would like to monitor the trust to see if things improve.
Therefore, I’m placing Ascott Residence Trust on my watchlist. The current decline in unit price doesn’t present an opportunity for me as a long-term investor.
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Stock Discussion on Ascott Residence Trust
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
