Ascott Residence REIT(HMN.SG) is a Singapore-listed real estate investment trust. It is also a member of Singapore-listed CapitaLand Limited(C31.SG). Ascott REIT focuses on developing income-producing housing assets. They include student accommodation properties, serviced residences, and rental housing properties. Ascott also invests in real estate properties for value appreciation. Read also How to Invest in Property Without Buying One.
Ascott REIT has a well-diversified portfolio of real estate properties across the world. They are in Asia, Asia Pacific, Europe, and the US. As of 12 June 2020, ART has 88 properties with 16,000 units in 38 cities, including London, New York, Paris, Tokyo, and Singapore of 15 countries. The portfolio has a total market value of S$7.2 billion. Ascott REIT was reconstituted as a stapled group- Ascott Residence Trust, incorporating Ascott RET and Ascott Business Trust following a merger with Ascendas Hospitality Trust in 2019.
Ascott possesses a well-diversified combination of assets. Most of them are freehold properties. That said, the trust holds these assets forever and doesn’t have to pay for extra costs relating to land ownership. The type of property comprises 63% of properties by 31 December 2020.
The nature of the properties for services is mid-term for the most part. The advantage is it is a consistent profit source. Let’s see figures: The average length of stay for the trust is three months. What’s more, more than two-thirds of income belongs to stable income sources. Of these, 57 are servicing residences, 18 hotels, and 11 rental housing.
The stable income comes from two sources: 1. Master leases; 2. Management contracts with minimum guaranteed income(MCMGI). The income helps Ascott weather the health crisis and retain a steady income stream. Besides, close to 70% comes from the Asia Pacific area.
Moreover, Ascott REIT has become a component of FTSE EPRA Nareit Global Developed Index, broadening its institutional inventors globally and enhancing the trading liquidity of its shares. The significance is Ascott becomes a global brand and has more options for financing and business expansion.
Commitment to Environment, Social and Governance operations
Ascott is seeking to promote a green environment for clients and staff to work and interact. Up until now, ART has got 15 green certifications for its assets. The company also obtains a Maiden Green Loan for the “Lyt One-North Singapore” project.
The loan vetting process is stringent even if the project has got BCA Green Mark Goldplus. Besides, Ascott has also put more resources educating customers on Green life.
Ascott plays an active part in promoting social activities. Volunteer work becomes a part of Ascott’s staff’s schedule. One of the aims is to provide shelters for healthcare workers, migrants, foreign workers, and people affected by the pandemic.
Ascott pays regular visits to people disadvantaged. ART also donates staples like meals, sanitizers, and schooling materials to children of low-income families.
Ascott believes good governance promotes a company’s efficiency and corporate well-being. As a result, it leads to customer’s and staff’s satisfaction and makes Ascott’s a happy place to stay and work.
Ascott House Trust ranks 3rd on the Governance and Transparency Index of Singapore. ART has already got the ranking for three consecutive years.
Ascott doesn’t stop here. It is still expanding:
- Quest Macquarie Park Sydney project
Ascott acquired the property for A$46 million in February 2020. It lies near the Macquarie Park Business Centre, the second largest business center in Sydney. It is home to the technology, telecommunications, pharmaceuticals, and electronics industries.
The Sydney property is freehold and comprises 111 units. The current earnings-before-interest-taxes-depreciation-amortization(EBITDA) yield is 5%.
What’s more, it is a master lease; that said, it adds a stable income source to the trust. Besides, an annual rent index clause of 4% is on the lease to protect against inflation risk.
- Student accommodation project
ART purchased student accommodation property for the first time for USD95 million in February 2021, supporting the trust’s product diversity and downside protection.
The project “Signature West Midtown” in Atlanta, Georgia, USA, is a freehold property. It has 153 beds and an average length of 1 year stay with a 95% occupancy rate. The current EBITDA yield is 5%. This is one of Ascott REIT’s aims for another source of income for the growth of the portfolio.
- Redevelopment and new projects in progress
Ascott is rebuilding the Somerset Liang Court Singapore, and it is due to completion in 2025. The project situated in Clarke Quay Precinct will provide 192 units to customers of a serviced residence.
Ascott Trust is also building “lyf One-North Singapore” and plans to complete it in 4Q 2021. The project can provide 324 units of co-living property.
Response to the Pandemic
Ascott takes the following steps in reaction to the crisis:
1. Work with Bureau Veritas to carry out “Ascott Care’s 9 Commitments” for worker’s safety and health.
2. Reduce cost and postponement of capital expenditures
3. Use technology to contain contagions of the disease. The service robots, self-check-in kiosks, and 3D virtual tours are on the frontline to serve.
4. Provide shelters to people in need. They are self-isolated for observation, some working on rotating jobs, medical duties and travelers affected by border closures. Ascott also offers help to people stuck due to border closure.
5. Capitalize on the space of the properties for work and leisure purposes.
6. Convert some apartments into fitness rooms and live streaming studios.
7. Offer rental relief measures like rent waivers, cancelation. Moreover, Ascott extends Master lease agreements for a more extended period beyond 2021.
Ascott REIT said in the last annual general meeting: The challenge of 2020 was like no other. The damages to the global tourism and hospitality industry are no less severe than others. It has lost USD1.3 trillion.
Ascott REIT has its distributable income of S$94.20 million. Of these, S$45 million is the one-time gains from the sale of the property assets in its portfolio. 2.6% of income comes from currency hedges. It is 43% less than 2019. The distribution per stapled security(DPS) is S$3.03cents, 60% less than 2019.
Close to 70% of Ascott’s income comes from Asia-Pacific, an expanding and robust region. It is to bring more stable income streams to Ascott REIT.
Ascott has completed the “Quest Macquarie Park Sydney” project. It is to launch the “lyf One-North Singapore” by year-end. The “Signature West Midtown” project is a new try for Ascott REIT to move into the academic accommodation business. It is confident the strategy will bring more income to the stakeholders as a whole.
One of Ascott’s strategies is to capitalize on asset value and sell at premium prices. They are likely to add more value to Ascott. Some of them are:
- Somerset Liang Court Singapore;
- Somerset Abzabu Ethe East Tokyo;
- Ascott Guangzhou;
- Citadines Didot Montparnasses Paris;
- Citadines City Centre Grenoble;
- Somerset Xu Hui Shanghai.
Ascott predicts the redeveloped and resales are to bring more cashflows and profits to Ascott’s owners.
Financial Strength 2020
Ascott Residence REIT(HMN.SG) has enough cash on reserve for emergencies even in the pre pandemic levels. The trust has S$1.05 billion at year-end 2020. S$490 million in cash, and the remaining of S$560 million is credit facilities. Ascott predicts the reserve can cover three years’ fixed costs under zero income circumstances.
Ascott maintains solid financial status. The gearing ratio is low at 36.30%. The trust has ample room to use financing power in need. NAV per unit stood at S$1.15, gearing at 36.3% with S$1.9 billion of debt headroom, and interest cover at 2.2 times (as at 31 December 2020).
The trust’s interest coverage is 2.2x. The ratio measures whether a company can serve debt interests. In the low-interest era, Ascott should have enough earnings power to cover interest costs in the future.
Fitch Ratings downgrades Ascott’s ratings from “BBB” to “BBB-” but keeps the outlook “stable .” Fitch is concerned about ART’s reduced earnings capability.
But it also points out the pandemic is the fundamental cause of the decreasing earnings to the industry. Fitch mentions it may take three years for the hospitality industry to recover to the pre-pandemic level. The process is gradual but still depends on the development progress of the global crisis recovery.
Fitch is still confident of Ascott’s business outlook. It is optimistic about the trust’s diversified portfolio assets and quality of earnings power like more fixed-income streams and long-stay accommodation leases.
You should keep an eye on two metrics:
1. Funds from operations(FFO) net leverage ratio
It is a real estate investment trust’s earnings power to service debt. It deems highly leveraged and results in a downgrade if it is more than 10x. Fitch thinks Ascott’s FFO will decrease until 2023 before it improves again, like others in the industry. Therefore, a downgrade is a necessary step for ART.
2. Funds from operations(FFO) interest coverage ratio
It is a metric about Ascott’s serve debt’s interest. A downgrade may result if it is lower than 2.5x for some time. Identical to the first ratio, Ascott’s is about 2x. It may take some effort to improve the earnings.
Though downgraded on credit rating, Ascott’s fundamental factors remain intact. Sufficient reserves and low leverage are essentials to keep it on track to normal. Capitaland is a sure backup to the subsidiary, just in case.
Unless the industry is not your category of favor, Ascott REIT (HMN.SG) is a good fit for the long-term pick. The reason is not a quick and short price appreciation. The stable and attractive 3% yield and long-term hold are considerations for steady REIT investors.
Ascott has still been expanding its portfolio by acquiring properties of good earning power despite the crisis. ART increases the value by divesting assets over book values from 44% to 63%. The overall amount after divestments for 2020 is S$570 million. It helps the trust’s goal of stable and solid income.
The tourism and hospitality industry is one of the hard-hit industries worldwide. Ascott is no exception. Outstanding performance and solid financial position are the central pillars for an enterprise to ride through a storm like ART.
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