Ascott Residence Trust: Should I or Should I Not?

Contributed by: Warriortan

logoAscott Residence Trust (ART:SP) has leapfrogged SPH Reit (SPHREIT:SP) to become the #3 largest stockholding in my portfolio after the recent rights issue. By value, it is 4.2% of my total portfolio now.

Some of you may still remember my previous blog-post on SPH Reit in which I outlined my reasons for keeping a substantial holding in it. See: Positioning for SPH Reit 

1. The Dilemma

But I am not sure about ART.

If I use the very same yardsticks on ART,  I DO NOT feel the same compelling reason to have such a big exposure. But at the same time, I recognised that it had just done a 29:100 rights issue to fund their acquisitions and growth ambitions. Maybe it needs more time and I should wait and see. The other option I am considering now is to reduce my ART exposure by half.

Should I or should I not – That’s the dilemma I am facing now.

In some ways, I am in a lucky position as I had managed to get excess rights at an “attractive” price of 91.9 cents each and thus I was able to use them to average down the cost of my ART shares. If I sell now, I will be just breaking even, which makes me feel better if I do sell … LOL.

Economics lessons tell us that historical purchase price is sunk cost and therefore it is not relevant to my SELL decision. However, we are all human after all and none of us like to lose money in our investments. It is extremely tough to strip emotions fully out of personal financial decision. It may be possible if we are doing at a professional level when you are dealing with someone else money. Anyway, it is an important skill that I am still learning and far from mastering it.

By writing this post, I hope to invite you to chip in to give your views especially if you are also familiar with ART.

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2. Introduction to Ascott Residence Trust

To some of you who may be new to ART, let me pen a simple introduction for you:

ART was established with the objective of investing primarily in real estate and real estate-related assets which are income-producing and which are used or predominantly used, as serviced residences, rental housing properties and other hospitality assets in any country in the world.

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ART has an asset size has more than quadrupled to S$4.8 billion since it was listed on the SGX in March 2006. Ascott Reit’s international portfolio comprises 90 properties with 11,627 units in 38 cities across 14 countries in Asia Pacific, Europe and the United States of America. They are mainly located in key gateway cities such as Barcelona, Berlin, Brussels, Guangzhou, Hanoi, Ho Chi Minh City, Jakarta, Kuala Lumpur, London, Manila, Melbourne, Munich, New York, Paris, Perth, Shanghai, Singapore and Tokyo.

Ascott Limited, a wholly owned subsidiary of Capitaland, is the sponsor or ART.

Ascott-RT-April-16-2017

3. Its Recent Performance has NOT been Great But it is still Growing in Size year on year

See table below, extracted from ART’s 2016 Annual Report

  • Actual distribution per unit has been dropping from 2012 to 2015 (even when adjusted for right issues).
  • 2017 first distribution after right issues has not been great. It is only 1.51 cents for the quarter or an annual yield of 5.5% only, which is below the lowest of the last 5 years. On that account, the current share price feels very expensive.
  • Despite the increase in total assets year-on-year from 2012 of 3 Bln to 4.8 Bln , its Net Asset Value barely climbed. 2016 NTA is actually the lowest of the last 5 years. 2017 NTA is expected to be even lower than 2016.
  • From 2013 to 2017, it has carried out 2 major rights issue to tap the investors for additional money. I am not sure the additional equity was used wisely.102058445-up-down-chart.530x298
  • Management expenses ratio went up from 2013 of 1.0% to 2016 of 1.3% despite the assets size increasing > 50% for the same years – where is the economy of scale expected from overheads saving?
  • Gearing ratio is already very high at close to 40% at end 2016. The lowest was when it was reduced to 34% after the right issues in 2013 but it went back to 38.5% the next year. Looks like ART management likes high gearing. I am not sure I like that.

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4. Is it a case of Growth at all cost?

The recent planned acquisitions are dilutive, meaning that the yields on those new assets is lower when compared to its current dividend yield.

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“Reference: “Ascott Reit unit holders will have the option of purchasing up to 481.7 million rights units at a ratio of 29 rights units for every 100 units they own. The rights units will be issued at 91.9 cents – a 21.5 per cent discount to the closing price of $1.17 per unit on Monday. Ascott Reit expects yields of up to 4.5 per cent for the acquisition of AOS and 5.4 per cent for the German properties.” Source: The Straits Times, 8 March 2017.”

So, why acquire these “lower yield” assets? It will benefit the manager for sure but does it benefit unitholders like us?

AcquisitionIt appears to me that the only reason that ART was doing this rights issue was just to strengthen its balance sheet and maybe to become an even bigger company… BUT for what? To be able to buy more “dilutive” assets? Or is it because the scale and geographical reach of a hospitality REIT like ART is a strategic requirement? But I like to know that from the management if that’s their insights.

I remember my lecturers mentioned that during my Competitive Strategy Class. The case study then was Singtel’s purchase of Optus at a high valuation but offered a new strategic diversification. The situation was a Catch22, in local slang “Buy also die, don’t buy also die” … so Singtel probably thought it might just well go ahead to buy it and give it a shot. For Singtel, I am glad that they managed to pull it through.

Isn’t ART supposed to driven by its mission of “delivering stable and sustainable income to unit holder”? Somehow I feel a disconnect between actions and mission given what I have seen and learned.

It is very clear that Growth by acquisition is firmly a main part of ART’s strategy. (see below, source: ART’s 2016 Annual Report)

ART Strategy

5. So, are there merits to hold on?

Probably for the following reasons:

a. ART has a few well established brand names like Ascott, Citadines and Somerset.

b. It has a strong sponsor who can inject assets to ART, which has the first right of refusal.

c. It has deep pockets sponsor and owner (Capitaland and Temasek). The latter owns a large stake of close to 45% of the company. They would not want to lose money too.

d. It offers unique diversification opportunities like geographical, currency and serviced residences industry. You can’t find another similar one in Singapore.

e. It still pays decent dividend yield.

f. There may be possibility to improve efficiency and lower cost and thus improve profitability if they start to pay more focus on it instead of growth.

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g. Stable management team. Mr Ronald Tay, the CEO has been in the helm for the last 4 years. This enables consistent in strategy, seeing through his and his team’s efforts and be accountable for the outcomes. But can he reverse “his” strategy and adapt it when things have changed?

6. Disruptive Trend

I am also concerned about the impact of disruptive trend like AirBnB on ART.

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7. Not many Buy recommendations on ART from the analysts

Most of the analyst reports I have read about ART is either hold or reduce.

8. So Should I or Should I not?

In the process of researching the information typing this posts, I more or less have made up my mind to reduce my exposure. Maybe not at one go but eventually, I will want to halve my holding by end of June.

So, what do you think? Hope you can share your thoughts with me.

Thank you.

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