Ascott Residence Trust (Credit View)- Resilient hospitality REIT August 26, 2019 471

Ascott Residence Trust (ART) is a Singapore-listed hospitality trust that owns serviced residences, rental housing properties and other hospitality assets. As of 30 June 2019, its total assets stand at S$5.5bn comprising of 74 properties with >11,700 units in 14 countries. ART is managed by Ascott Residence Trust Management Limited, a wholly-owned subsidiary of CapitaLand Limited.

 

Operating model – 3 types of leases:

  • Master leases – The Trust generates rental income through a fixed net rental rate paid by master lessees (tenants). Master leases have relatively longer terms, improving income visibility. As master lessees bear the property expenses including property taxes, insurance and maintenance, ART enjoys higher gross profit margins from such leases.
  • Management contracts – Operators that provide property management services are contracted and paid a fee to manage ART properties. Income to ART is derived from the rental income generated (Revenue per Available Unit RevPAU) which is determined by occupancy rate and average daily rate (ADR). Management contracts provide less stable income than master leases. However, there is more upside potential if RevPAU improves.
  • Contracts with minimum guaranteed income – Similar to management contracts, the property management services operator guarantees to pay any shortfall should income be lower than a pre-agreed minimum income level. This provides more stable income than management contracts due to downside protection.

 

Overview:

(+) Strong credit profile

(+) Income stabilized by hybrid hospitality operating model

(-) Substantial room supply hitting key markets, however, diversified portfolio reduces impact

 

CREDIT VIEW

(+) Strong credit profile – As at 30 June 2019, the Trust’s gearing ratio stood at 32.8%, which is relatively under-geared against the 45% gearing ceiling for REITs. Interest coverage was at a healthy 5.2x, which is comparable to other hospitality trusts, and effective borrowing cost was significantly low at 2.1% given an investment-grade rating by Fitch of ‘BBB’.

c.88% of debt are on fixed terms, mitigating the impact of interest rate volatility. Weighted debt expiry is fairly long at 3.9 years with no major refinancing in the short term.

S$150mn and S$250mn of fixed-rate perpetual securities with rates at 5.00% and 4.68% per annum respectively have upcoming call dates of 27 October 2019 and 30 June 2020 respectively. This gives ART opportunities to refinance at lower rates given the current low-interest-rate environment.

In addition, the planned merger with Ascendas Hospitality Trust by end-2019 could improve credit ratings from being an enlarged combined entity, potentially reducing borrowing rates further.

As for growth plans, ART currently has a right-of-first-refusal (ROFR) pipeline of 20 properties. ART’s sponsor, Ascott Limited has a target of 160,000 units by 2023, with 100,000 units as at 21 January 2019.

 

(+) Income stabilized by hybrid hospitality operating model – Unlike hotels, ART owns serviced residences that offer limited services compared to the full range of services. Serviced residences attract a guest base with purpose of expatriates’ relocation, corporate assignments, project groups and extended-stay. Such a guest base make up a significant portion of ART’s guests, which bring less cyclical compared to hotels, which are primarily tourist driven.

For the period 2QFY2019, c.39% of ART’s gross profit was derived from stable streams (master leases and MCMGI) while c.61% was derived from more variable management contracts. Weighted average tenure of stable income contracts of approx. 5 years.

 

(-) Substantial room supply hitting key markets, however diversified portfolio reduces impact – High upcoming room supply in ART’s operating countries, namely Japan, China, Germany, UK, Vietnam and Australia, will put downward pressure on RevPAU. This is mitigated by ART’s diversified portfolio, of which no geography accounts for more than 15% of gross profit.

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