Friday, July 3, 2015

Ascendas Hospitality Reit

I must admit that I have been busy lately and have not been following news on REITS. Although at the back of my mind, I know that rising interest rates is a huge deterrent in investing in REITs, we would still need to compare to see what else is there to put your money in. It's not wise to keep everything in cash either, unless there is aforeseeable risk in the future. Therefore, I have taken some steps to review one of my three existing reits - Ascendas Hospitality Reits.

Summary of this REIT

This invests in hotel properties across Australia, Japan, Singapore and China. It is a total of 6 properties in Australia contributing to about just less than 50% of total revenue, 2 in Beijing contributing to 9% of revenue, 2 in Japan contributing to 22% and 1 in Singapore contributing to about 25% of revenue.

Off the top of my head, the key factors to consider for this REIT are:
1. Quality of the Hotel
2. Currency Risk
3. Tourism
4. Rising Interest Rates

I did a bit of poking around on the internet and was pleasantly surprised to see that almost all of the hotels are pretty good ratings on tripadvisor with most about 3.8 out of 5 stars. It seems like the management values location since the running pros for these hotels was its locations across all countries. However, a few did talk about the dated structure so there may be a need to overhaul the hotels properties some time in the future. Occupancy rate for the Australia properties averaged in the 80 percentile, pretty good since the average occupancy rate was about 65%

Currency risks and tourism is pretty related. With a weakening Yen and AUD against the SGD, it does seem that there may be issues with revenue in the future. This is already reflected in the latest earnings update as there was a weakening from revenue and profits derived from the Australian properties. Although this bode wells for tourism from these countries, currency risks remain a double edge sword. I would need to review to see if management has in place any hedge from currency risks but it doesn't seem to be any currently. Tourism in australia is set to grow and the australian government does seem to place a good focus on tourism as an industry. Airbnb is pretty big in Australia so this may be worth taking note since i do see airbnb having a direct and substantial impact on the hotels sector despite what Airbnb is claiming.

Rising interest rates is a cause for concern. Everyone knows it is coming but honestly, we don't know what the impact on the market would be, and whether we should drop all REITS for the time being and wait for a better time to enter. It is worth noting that 23 million debt is up for refinancing in July 2016 and interest rates would probably have risen since then. i don't think it is going to be substantial but probably by at least a further 1.5%. 23 million represents only a 5% of its current debt, so if we add this together with the floating rate debts that it currently has (which is now at 11.1%), that would bring it up to 16.1% at a really much higher rate. That's something to think about when comparing other options in the market

Financial numbers

1. current gearing is 37.2%. I am not optimistic that valuation for these properties would increase since the outlook for property in Australia, Japan and Singapore is that it is currently overvalued. If there is revaluation, current gearing may increase.

2. interest rates is currently at 3.2%. Pricing in a potential increase in interest rates for the 16.1% debt, i have estimated an increase of about 10% in interest rates, bringing it up to 3.5%

3. NAV is 0.74. Hence the current price is trading at a discount of 95%

4. Distribution Yield is at 7.126%

5. EPS is 0.3% and a current P/E of 27. PE is pretty high, not sure if its worth the price.

In summary, its a mixed bag for this REIT. I would review the other 2 to see how they fare in comparison.

Update: I've reviewed the other REITS on SGX that are in a similar industry.

Ascendas Hospitality REIT
Ascott REIT
Far East REIT
AU, JP, NZ, Maldives, SG
SG only
P/E ratio
Current Price
Dividend Yield

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