Ascendas Hospitality Trust: A nibble.

This business trust owns hotels in Australia, China, Japan and Singapore. 

Unlike rental income from industrial, commercial or residential properties, for examples, a hotel's income is less stable. 

It has a strong element of seasonality.

As most of Ascendas Hospitality Trust's properties are in Australia, China and Japan, its income is also very much subjected to foreign exchange risks.





Hotel Sunroute Ariake in Tokyo is located in the heart of the Ariake area near the Tokyo Big Sight Convention Center.


To make it more attractive as an investment for income, at its IPO price of 88c a unit, yield was engineered to be higher through a 1 year waiver to income distributions by the sponsor. 

The income forecast was also very optimistic.





To be fair, it was probably a difficult job to provide an accurate forecast and, in July 2012, I said:

"I feel that I need to be conversant in the economies of three countries and the health of their respective tourism sectors to analyse how well they could continue doing. 

"I would also need to take into consideration that income would be collected in three foreign currencies and converted to S$ for distribution to unitholders.

"Foreign exchange rates would affect income in S$ terms.

"So, analysing this Trust and forecasting its future income is somewhat more challenging. It is less straightforward." (See related post #1)





I do understand that having properties in different countries reduces the risk of concentration. 

However, whether it is worth having to deal with so much foreign exchange risk or not, I am not sure.

The Trust's unit price suffered a big decline when it did an equity fund raising through a placement to raise $50 million to partially fund the purchase of Osaka Namba Washington Hotel Plaza in Japan not too long ago. 





The price? 

68c a unit. 

The number of units in issue increased by 7.1%.

Gearing is estimated to be about 38% while NAV per share is about 74c. 





Its relatively high gearing level could be a source of concern although the Trust does not have any debt due till 2016. 

I do, however, like that more than 83% of the Trust's borrowings are in the local currencies. 

This provides a natural hedge against foreign exchange risk.

Osaka Namba Washington Hotel Plaza

What about the DPU?

Well, although the DPU became more realistic with the expiry of the sponsor's waiver to income distribution, seasonality makes it inaccurate to annualise any one quarter's DPU. 

So, instead, I simply added 4 consecutive quarters' income distributions which gives me a 12 months DPU of 5.5c. 

This is probably more realistic than the forecast of 7.07c during the IPO. 

At a price of 72c a unit, therefore, a realistic distribution yield is 7.64%.

Although the Trust has hotels in a few countries, most of its properties are in Australia. 

So, how well the Australian economy and hospitality sector do will have a big impact on the performance of the Trust. 

A stronger A$ will be good for the Trust. 

Will this happen? 

Well, if the much talked about recovery of the global economy takes place, then, yes.

For someone who is in search of more stability in passive income generation, hospitality business trusts, Ascendas Hospitality Trust included, might not be the best places to look. 

However, if we feel that the Trust's current DPU is realistic (which is another way of saying "not inflated"), then, as an investment to diversify our sources of passive income, it might be worth a nibble.

Having declined to a price of 72c a unit, investors who got in at IPO would still be nursing a paper loss even after taking in the income distributions received so far. 

They might want to ask if they were not already invested, would they initiate a long position at today's price?

See portfolio of hotels: here.

Pullman Sydney Hyde Park - Australia




Related post:
1. Ascendas Hospitality Trust: Am I interested?
2. OUE Hospitality Trust: Considerations.

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Soilbuild REIT: A nibble.

I blogged about Soilbuild REIT slightly more than a year ago. It did badly during its IPO and I said that, already having a huge exposure to industrial properties S-REITs then, I was not interested even as its unit price declined to 70c.

At the time, I also told a reader that if the REIT's unit price should decline so much as to offer a 10% distribution yield, I would initiate a long position even with my already large exposure to industrial properties S-REITs. That didn't happen.

Since then, the REIT's unit price has recovered thanks, to a large degree, to Chinese billionaire Tong Jin Quan who bought into the REIT. The more sanguine attitude Mr. Market has towards REITs in recent months probably has a large part to play in the price recovery too.

Of course, since then, my exposure to industrial properties S-REITs has also reduced by quite a bit, largely from the reduction of exposure to Sabana REIT. With my portfolio's much lighter weighting in industrial properties, I revisited Soilbuild REIT.

At almost 80c a unit, the estimated distribution yield is 7.5%, annualising a quarterly DPU of 1.5c. Although this is not enough for me to unlock my war chest, I decided to initiate a smallish long position which gives me an incentive to continue monitoring this REIT and to possibly make a bigger investment in future.

The following is taken from the REIT's presentation slides dated 29 July 2014:

Gearing: 30.3% (Will increase to 32% after acquiring 20 Kian Teck Lane.).

Average all in interest cost: 3.08% (95% hedged).

Interest cover ratio: 5.4x.

NAV/unit: 80c.

Portfolio remaining land lease: 49 years.

Occupancy: 98.5%

Two things that investors in Soilbuild REIT should keep an eye on are:

1. 32% ($95m) of debt is maturing in 2015.

2. 29.2% (accounting for 22.4% of rental income) of leases are expiring in 2015.

I do not think that the REIT will have trouble refinancing its debt. However, the concern would be the cost of debt. It is unlikely that the cost of debt would be lower. If cost of debt were to increase by just 1% for debt maturing in 2015, distributable income would see a reduction of some 4%, everything else remaining equal.

For leases expiring in 2015, it would be realistic to expect that not all would be renewed. Not all the expiring leases in 2014 were renewed. If the REIT should be unable to find new tenants, expect occupancy to decline. The supply of industrial spaces in Singapore is not as tight as it once was.

Going back to the concern of a possibly higher cost of debt, if risk free rates were to increase by 1%, Mr. Market could demand a yield of 8.5% (from the current 7.5%) from Soilbuild REIT. In such an instance, unit price would have to fall to 70.5c to meet such an expectation, all else remaining equal. We have to be aware that this is a possible downside and a very real possibility too.

Like with any other investment, if Mr. Market should offer much lower prices like when he threw a big tantrum in the middle of last year, what some called the "Taper Tantrum", we could buy more with bigger margins of safety. I could develop a bigger appetite quite suddenly then. For now, it is just a nibble.

See presentation slides: here.
See announcement: here.

Related posts:
1. Soilbuild Business Space REIT (Soilbuild REIT).
2. Bonds, REITs and the instant gratification of yield.