SINGAPORE (Apr 29): Now that the shareholders have approved CapitaLand’s proposed merger with Ascendas-Singbridge, attention may turn to synergies and overlaps in the two companies. In particular, ASB’s hospitality arm, Ascendas Hospitality Trust (AHT), is likely to come under the microscope. The clear overlap in the merged company is ASB’s hospitality business and CapitaLand’s lodging business under The Ascott Ltd and Ascott Residence Trust (ART).
The two REITs are not exactly similar. AHT owns 14 hotels valued at $1.8 billion, while ART owns 73 properties valued at $5.3 billion as at Dec 31, of which five are hotels and the rest are serviced residences. Three hotels are in New York, one in Hamburg and one near Sydney Airport.
CLSA says the recent proposed merger between OUE Commercial REIT and OUE Hospitality Trust “underscores the need for S-REITs [Singapore real estate investment trusts] to drive scale in order to compete with regional peers. At the same time, it highlights that some of the smaller illiquid S-REITs are undervalued and may be targets of future mergers”. Among the REITs that could merge are ART/AHT, Frasers Commercial Trust/Frasers Centrepoint Trust, the smaller industrial REITs and the smaller Chinese retail REITs such as Sasseur REIT and BHG Retail REIT.
So, what is in AHT and why has it been somewhat under the radar despite its security price rising almost 17% this year? With size comes liquidity and recognition. The threshold market capitalisation for REITs to get noticed by fund managers or qualify to get into regional indices is US$1 billion ($1.35 billion). AHT’s market cap currently is $1.03 billion. The market cap qualification for the FTSE EPRA/NAREIT Developed Market Index is a free float of US$1.26 billion, so AHT still has some work to do before it joins the “big boys”.
At present, following some restructuring in 2018, AHT owns 14 hotels in Asia-Pacific. Six are in Australia: a Pullman and Mercure each in Brisbane and Melbourne, and a Courtyard by Marriott, a Pullman and two Novotels in Sydney. In Singapore, the REIT owns Park Hotel Clarke Quay.
In May 2018, AHT divested of two hotels in Beijing for RMB1,156 million ($233.6 million) at an exit yield of 3.6% and for a gain of 101%, as the sale price was RMB582 million above the aggregate valuation of RMB574 million. The two Beijing hotels were part of AHT’s portfolio at IPO in 2012, acquired for RMB416 million.
The monies were recycled. AHT acquired The Splaisir Seoul Dongdaemon in May 2018 and Ibis Ambassador Seoul in Insadong in December 2018. Two midsized economy hotels in Osaka were purchased in September and a third was acquired in December, taking the number of the trust’s Japanese properties to five. The blended yields for the new properties were above 4%.
Pro forma distribution per security for FY2018 (the REIT has a March year-end) would rise to 6.35 cents, compared with DPS of 5.86 cents for FY2018. The pro forma net asset value would be $1.02 as at March 31, 2018 compared with the actual NAV of 92 cents. AHT’s NAV as at Dec 31, 2018 was 98 cents. AHT closed at 90.5 cents on April 25.
“The proceeds from the sale of China hotels have been effectively recycled into acquisitions, which reinforced our diversification strategy and will add further stability to the income stream of the portfolio,” says Tan Juay Hiang, CEO of AHT’s manager.
Stability from Seoul and Osaka acquisitions
The Seoul and Osaka hotels have freehold tenure compared with the Beijing hotels, whose land leases expire in 2044. The recently acquired hotels are also newer, and have lowered the average age of the portfolio from 23 years to 17 years, while raising the value of the freehold portion of the portfolio to 93% from 73% previously.
What is more important for DPS, though, is the lease structures of the five hotels. The two Beijing hotels were on management contracts, which can be volatile. Moreover, in the last few years, there has been an oversupply of hotels in China, which lowered revenue per available room (RevPAR) across the board.
The master lease structure for the Splaisir Seoul Dongdaemon is based on fixed rent or percentage of room revenue, whichever is higher. The Ibis Ambassador Seoul’s master lease is based on a percentage of total revenue with a minimum rent. The Osaka hotels are on fixed rent only.
The lease structures stabilise the portfolio, as 51% of the portfolio by net property income is now on a master lease and 49% of NPI — mainly from Australia — is on management contracts. Previously, 40% of NPI was on a master lease and 60% on management contracts.
Australian market to remain soft
For 3QFY2019 ended Dec 31, NPI from AHT’s Australian portfolio fell 17% to $11.4 million because of the weak Australian dollar and a soft market.
The Australian press has reported that 8,000 new rooms are likely to come on stream this year in the state capitals of Melbourne, Sydney and Hobart, up 19% y-o-y, and a further 11,500 new rooms are likely to be added next year.
For instance, Melbourne is likely to see 2,243 room openings this year, up 5% y-o-y, out of a total of 2,388 rooms in Victoria.
The good news for AHT is that 33% of Australia’s new supply this year are in the upscale and upper-upscale segments, while 22% are in the midscale and luxury segments. AHT’s Australian hotels are mainly positioned in the mid-scale segment.
Despite new supply, AHT’s average occupancy rate for its Sydney hotels remained at around 90%, but room rates were generally weaker, the REIT’s manager said in a results statement in February. Similarly, supply also weighed on the performance of AHT’s Brisbane and Melbourne hotels.
However, the Brisbane market may recover, as the new supply of rooms is expected to decline over the coming years, AHT’s manager said.
Brisbane to rock with new A$3.8 bil integrated resort
Brisbane has been undergoing a rejuvenation of sorts. Plans are underway to build a A$3.8 billion ($3.68 billion) integrated resort, including a casino, at Queen’s Wharf. Companies involved include Chow Tai Fook Enterprises, Far East Consortium International and The Star Entertainment Group.
Elsewhere in Brisbane, the Brisbane Transit Centre will be demolished as part of the A$5.4 billion Cross River Rail project, with a new underground train station and the Brisbane Live entertainment precinct to be built on top of the station. All this should be positive for AHT’s Pullman and Mercure branded hotels in Brisbane.
In 2015, AHT announced a forward purchase of Shama Luxe Aurora Melbourne for A$120 million from Bursa-listed UEM Sunrise, which will be completed in 2H2019. While this could take a few years to stabilise, the acquisition comes with income support. According to an AHT announcement, NPI is likely to be A$9.1 million in its first year of operation, translating into an estimated NPI yield of 7.6%.
UEM Sunrise has agreed to top up the shortfall in the event predetermined gross operating profits during the first two years of operation are not met. This provides to a certain extent downside protection during the first two years of operation in order for the property to be stabilised.
AHT’s gearing stayed flat at 33.1% as at Dec 31, but could rise to 37%, assuming it pays for Shama Luxe Aurora with debt. As at Dec 31, weighted average tenor of borrowings was 3.8 years, with no significant refinancing requirement until 2020. Weighted average interest rate was 2%, with 81.3% of the borrowings on fixed rates.
Overall, AHT’s NPI was flat y-o-y in 3QFY2019, while NPI for the nine months to Dec 31 fell 4.4% to $62.3 million. DPS for 3Q rose marginally to 1.45 cents, which, if annualised to 5.8 cents, gives a DPS yield of 6.44%.
On April 25, activist fund manager Quarz Capital Asia wrote an open letter to the manager of AHT. Quarz Capital director Havard Chi is proposing that ART acquires AHT in a cash and unit transaction where 0.75 unit of ART and 18 cents in cash will be exchanged for one unit of AHT for a total value of $1.08 per security, or a 10% premium to the last reported book value of 98 cents.
“[For] AHT unitholders, this potential offer provides an attractive takeover premium of around 20%,” Chi says.
Chi is concerned that, owing to AHT’s modest size, any significant acquisition will also require a substantial capital raising from AHT’s existing investor base. “This has further weighed on investors’ sentiment on the trust,” he notes.
As for the potential acquirer, an ART spokeswoman points out that CapitaLand’s transaction with ASB is subject to conditions precedent being fulfilled. “We note the overlapping investment mandates of AHT amd ART. We shall be considering various options with the objective of maximising value for our unitholders and will make an announcement when there are material developments,” she adds.
This story appears in The Edge Singapore (Issue 879, week of Apr 29) which is on sale now. Subscribe here
