Hospitality trusts are viewed as the most volatile in the Singapore REIT (S-REIT) sector, as evidenced by their performance during 2020 and 2021, except Ascott Residence Trust (ART). (See Table 1). The reason is because ART is not just a hospitality trust. Since its inception in 2006, it has had — on and off — a portfolio of Japanese rental housing. And because its assets are mainly serviced residences with a few hotels, its sponsor, CapitaLand Investment (CLI) and The Ascott (TAL) which is 100% owned by CLI, describes ART as a lodging REIT and part of its lodging business.
During the pandemic, ART continued to focus on the long-stay sector, using capital gains to mitigate the volatility of its distributions per stapled security (DPS). In January 2021, ART acquired its first purpose-built student housing (PBSA) in the US state of Georgia for US$95 million followed by a swift succession of acquisitions in the same asset class.
In June 2021, ART and TAL jointly invested in Standard at Columbia, a freehold development PBSA near the University of South Carolina (USC). ART and TAL took a 45% stake each in Standard at Columbia, with the developer retaining 10%. Construction started in 3Q2021 and is expected to complete in 2Q2023. Upon stabilisation, the ebitda yield is expected to be approximately 6.2%.
In September 2021, ART acquired Wildwood Lubbock, a freehold 1,005- bed student accommodation asset for US$70 million ($96.48 million). Wildwood Lubbock serves Texas Tech. In November 2021, ART acquired Seven07, a freehold 548- bed student accommodation asset for US$83.25 million. The property serves the University of Illinois Urbana-Campaign.
In December 2021, ART bought a further four PBSAs in the US for US$213 million. The four assets have a total of 1,651 beds, serving more than 100,000 students across five universities in three states. The Link University City is located in Pennsylvania, Latitude on Hillsborough and Uncommon Wilmington are in North Carolina, and Latitude at Kent is in Ohio.
All in, ART held eight PBSA assets with about 4,400 beds as at the end of 2021. Seven of the student accommodation assets are operating assets that are contributing stable income while one is under development. Altogether, in 2021, ART invested a total of about $780 million in eight student accommodation assets and three rental housing properties at an average ebitda yield of about 5%. In a results briefing in January this year, ART’s manager had articulated having a target of as much as 30% in stable, long-stay assets such as PBSA and rental housing.
Continued focus on long-stay
On Aug 15, ART announced the proposed acquisition of nine properties, comprising five rental housing assets in Japan; La Clef Tour Eiffel, a serviced residence in a rather gorgeous Haussmann (Parisian style of 19th-century architecture) property in the heart of Paris; Somerset TD Haiphong; the remaining 45% stake in Standard at Columbia, the PBSA near USC; and Quest Cannon Hill, a long-stay property in Australia.
During a briefing on Aug 15, Serena Teo, CEO of ART’s manager, outlined six positive considerations for this proposed acquisition. In addition to an accretion of 2.8%, ART becomes the largest hospitality and lodging trust in Asia Pacific with an AUM of $8.3 billion. Income resilience will increase from master leases, rental housing and PBSA assets, with these two asset classes rising to 19% of ART’s total assets, which is in line with the stated target of up to 30%. ART also increases its presence in Paris to benefit from the recovery in demand. And the portion of green-certified properties in its portfolio rises to 38% from 35% before the acquisition.
“This transaction has a DPS accretion of at least 2.8%, will grow out assets under management by more than 7% to $8.3 billion and increase ART’s proportion of stable income sources from 69% to 71%. [Our] geographically-diversified portfolio ensures no concentration risk, which provides income resilience, as market demand typically moves unevenly,” Teo explains.
Including the acquisitions, ART’s portfolio will be 62% in Asia Pacific by assets, and 19% each in Europe and the USA. “A predominant 92% of gross profit from the acquisition portfolio is derived from stable income sources via master leases in the service residences in France and Australia, Japan rental housing and the US PBSA property. The remaining 8% comes from the service residence in Vietnam and a management contract which allows us to ride the growth of travel,” Teo continues.
Hospitality trusts riding rebound
For investors looking to ride the upside from travel resumption, Vincent Yeo, CEO of the manager of CDL Hospitality Trusts (CDLHT), has an encouraging outlook. “In general, globally, we’re seeing that leisure demand has been very strong. Corporate demand is recovering, but lagging in the pace of recovery. We are seeing corporate meetings and incentive business come back,” Yeo says during a results briefing on July 29.
“The next leg of recovery is transient corporate travel and that will further bolster the recovery. We are seeing a better pace of recovery from the conference and meetings market, which is part of the corporate market. What has been very encouraging for the Singapore market is that a lot of project groups and long stay project groups require group room inventory,” Yeo continues.
In his view, the transient, corporate traveller is taking a bit longer to come back. “In that context, the more leisure business there is to a certain hotel, the faster the recovery, and a lot of them have reached pre-pandemic levels of trading,” Yeo says.
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As Yeo sees it, hotels have learned to cope with a tighter labour force and extracted efficiencies from job redesign and technology. “We’ve been fighting to protect our margins, labour costs have gone up right across the board. But the government has been very proactive in helping the hotel industry and allowed for the dependency ratio to rise for the next two years. That makes sense in terms of the national strategy because you can see that there’s demand for people to come to Singapore, we need to be able to service this demand adequately and keep Singapore’s reputation as a hospitality hub strong. In the meantime, hotels have been very busy training the new labour force, and at the same time, keeping up efficiencies to maintain the margins,” Yeo elaborates.
Another challenge hospitality trusts such as CDLHT and the likes of Far East Hospitality Trust (FEHT) and Frasers Hospitality Trust (FHT) face is capital management. Trusts with a foreign footprint could also face headwinds in their foreign exchange management and hedging strategies. FHT’s manager articulated those challenges and the difficulty in growing DPS and NAV with an overseas portfolio. This was a reason it cited for its sponsor privatising FHT.
CDLHT, too, faces rising funding costs, because it has a higher portion of floating rate debt than trusts such as ART. In terms of fixed-rate debt, ART has 79% while CDLHT has 63.8%.
Their hedging policies are possibly different as well. Hedging is not cheap, especially in jurisdictions where interest rates are higher than the trust’s reporting currency. Fortunately for CDLHT, many of its overseas properties are in the UK, Europe, Australia, New Zealand and the Maldives. Interest rates in the UK, Europe and Australia are rising but still lower than those in Singapore which is tied to the US rate hike cycle.
On the flip side, currencies in the UK, Europe and Australia may have depreciated against the Singapore dollar. This would impact CDLHT’s NAV rather than DPS as its income is 50% to 75% is hedged, and the manager estimates how much cash is needed before hedging out further.
ART’s major markets are developed markets in Asia Pacific, US and Europe. Since the portfolio is so diversified, the portfolio in and of itself provides a natural hedge of sorts. Specifically for the proposed acquisition announced on Aug 15, 54% is funded with debt and more than 70% of the debt is fixed. In terms of hedging,
ART hedges about 20% of distributions repatriated in USD, AUD and euros. “We employ hedges where we think it’s optimal between volatility and costs. In addition, 50% of the balance sheet has a natural hedge,” Teo says. Furthermore, there is a natural diversification because of the large number of foreign currencies in ART’s portfolio.
Funding the acquisition
On Aug 16, ART announced it had exercised the upsize option for a private placement and raised $170 million at an issue price of $1.12. Of this, around $122.3 million, which is equivalent to 71.9% of the gross proceeds of the private placement, will be used to partially fund the acquisition portfolio.
Approximately $45.1 million (which is equivalent to 26.6% of the gross proceeds of the private placement) is likely to be used to partially fund any future potential acquisitions, including but not limited to rental housing properties, serviced residence properties and student accommodation and the associated costs.
Costs associated with the private placement of $2.6 million will also be paid out of proceeds from the private placement. The balance of the gross proceeds, if any, will be used for working capital. This is similar to the funding structure for the PBSA acquisitions in 2021.
In September 2021, ART raised $150 million, with the unused portion funding acquisitions announced in November and December 2021.
ART will be taking over the loans from its sponsor for the portfolio of nine properties. ART’s average borrowing cost is 1.7% and the cost for this acquisition is expected to be lower. ART will be taking some debt in euros for the Parisian serviced residence, and some US dollar and yen debt as well. The blended cost of debt will be lower than 1.7%, Teo indicated.
La Clef Tour Eiffel is the largest property in the acquisition portfolio comprising some 43% of the total acquisition cost of $318.3 million. Since La Clef Tour Eiffel’s loans were refinanced in early 2023, with a debt to expiry of 2.5 years, ART could get over the interest rate hike cycle by the time its loans mature.