SINGAPORE (Jan 30): By a stroke of good fortune, coincidence or foresight, Ascott Residence Trust (ART) signed an agreement to divest of Citadines Xinghai Suzhou and Citadines Zhuankou Wuhan at a price more than 30% above their combined property book values representing net gains of $21.2 million, at an exit capitalisation rate of 3.7%. The sales and purchase agreement was signed in Dec 2019 and completes in 1HFY2020.

“We do not expect the buyers to walk away. We’ve received RMB80 million out of RMB500 million. These properties are older with shorter leases periods [for the land] and would have needed significant capital expenditure for improvement and we do not see upside from there,” says Beh Siew Kim, CEO of ART’s manager.

“In Jan this year we signed a sales and purchase agreement to acquire a property in Sydney at an entry yield of 5%. This is a master lease property, with a more stable income component. We are divesting the properties in China at 3.7% and reinvesting into Australia at 5%. This is an accretive investment from our perspective,” she explains. On Jan 30 ART announced its planned acquisition of Quest Macquarie Park Sydney (picture above), a 111-room freehold property for A$46 million.

After the divestment, ART’s China portfolio will be reduced to five properties, which will contribute less than 5% of total gross profit. Currently, Chinese travellers account for less than 10% of ART’s customers.

The new coronavirus outbreak which started from Wuhan is reducing travel. Already, ART is reporting cancellations on bookings of short term stays in China. “In the last week or so, we’ve seen cancellations. In China cancellations are higher. Our Singapore properties are doing well, and some people are extending their stays,” Beh says during ART’s results briefing on Jan 30. According to Beh, ART’s customers are evenly split between corporate and leisure. The cancellations are generally from leisure travellers. 

ART has the most geographically diversified portfolio among the S-REITs. In terms of asset size, the largest geographic area is Japan accounting for 19.7% of the trust’s $7.4 billion asset size followed by Europe with 19.4%. Singapore comprises 17.4%, Australia 12.9% and US 12.4% of asset size. This includes the merger with Ascendas Hospitality Trust, with ART’s balance sheet reflecting the combination as at Dec 31, 2019. However, gross profit and distributable income will only be reflected this year.

The AHT boost will be welcome. ART’s revenue fell 2% y-o-y partly because of loss of income from the divestment Ascott Raffles Place and Somerset West Lake in Hanoi, but also because of an unstable macro backdrop, and micro issues in one or two markets. This includes a decline in the value of the Australian dollar versus the Singapore dollar. Because of geographical diversification, the currency impact on gross profit after hedges for FY 2019 was -0.2%.

Melbourne, in which ART has two properties one of which was from AHT’s portfolio, is expecting about 4,200 rooms coming on-stream between 2020 and 2022, resulting in hotels lowering room rates. Sydney has less of an oversupply, with 2,300 rooms built in the Sydney CBD by 2021 in the luxury sector.

New York City has also experienced new supply from the Hudson Yards project. Supply growth is likely to decline significantly after this year. In the meantime, ART has announced that its DoubleTree by Hilton Hotel New York is scheduled for AEI in 2Q2020. AEI at Element New York Times Square West was completed 2Q2019.

ART’s distribution per stapled security (DPS) rose 6% y-o-y in 4QFY2019 to 2.27 cents, including a top-up from gains from the sale of Ascott Raffles Place and Somerset West Lake, taking full year DPS to 7.61 cents, up 6% y-o-y. Net asset value stood at $1.25.

ART made divestment gains of $190 million from divestments in 2018 and 2019. For FY2019 ART gave unitholders $13.5 million in capital distributions. “We wanted to replace loss of income from divestments and to reward our ART unitholders for their support for the merger with AHT. So the idea was to reward unitholders and to deliver growth to our unitholders,” Beh says. ART’s larger size gives it options, should it need to support DPS further in the event the new coronavirus has a longer term impact on travellers.

In total, ART has paid out $30 million from divestment gains, and it has retained $130 million.

Since Beh was appointed CEO of ART’s manager, she has changed ART’s geographic focus. Developed markets now account for 75% for the trust’s earnings before interest tax depreciation and amortisation (Ebitda), and have done so for the past two years. The merger with AHT has also lifted free float market cap from $1.6 billion to $2.5 billion. These statistics qualify ART for inclusion into the FTSE EPRA NAREIT Developed Index.

FTSE EPRA announces the rebalancing of the FTSE EPRA NAREIT Developed Index every quarter, so ART’s inclusion is likely to be announced either in March or June this year. If so, it would be placed below Keppel DC REIT which was included last year, and above Keppel REIT. The largest local weighting is CapitaLand followed by its REITs such as Ascendas REIT.