The current outlook on the hospitality sector is looking pretty grim at the moment. With travel and tourism being badly affected by the COVID-19 outbreak, investors are turning away from the hospitality sector as a whole including hospitality REITs. Ascott Residence Trust
For myself, I started buying and will continue to buy more when the price is right! I believe in being greedy when others are fearful, even when it might seem foolish on the surface.
The question is, which one should we buy for the biggest upside but lowest risk? In this article, I’ll be sharing the potential upsides and downsides of Ascott Residence Trust and you can make your own decision by then. Stay tuned for the stock analyses on the other 3 hospitality REITs as they will be coming out soon !
Ascott Residence Trust (SGX:HMN)
This is the combined portfolio under Ascott Residence Trust, including assets that were under Ascendas Hospitality Trust. As you can see, they have a very diversified portfolio with assets in 15 countries. This reduces the risk of having assets being over-concentrated in one country.
Looking at the financial strength of the trust, we can see that they have a very low gearing of 33.6% and a low cost of borrowing at just 2%. It is also great that they have an interest cover ratio of more than 3, which is a healthy sign that their balance sheet is financially stable.
Currently the REIT has a P/B ratio of 0.688 which is really low and it means that you are paying for $0.688 per $1 of net assets. What a great deal !
Also, its current forward yield is about 8.3% though I wouldn’t count on it to give me even 7% in the coming few quarters. But as long term investors, we must be forward-looking. In about 3-5 years time, when everything recovers, I’m positive that Ascott Residence Trust can and most probably will yield 10% and up. I am investing in the future of the REIT rather than its current state because I know that in 3-5 years time, Ascott will be bigger than what it is right now.
The potential upsides that Ascott Residence Trust carries is its huge pipeline of assets from its sponsor, The Ascott Limited. With such low gearing, they can easily acquire some of the assets that are in the pipeline from its sponsor.
Also, Ascott Residence Trust is planning to do some Asset Enhancement Initiatives (“AEI”). Currently, there is already one AEI planned for Q2 of 2020, the refurbishment of the DoubleTree by Hilton Hotel New York.
The obvious downside is the lack in demand for the hospitality sector. Out of the 4 hospitality REITs, Ascott Residence Trust has the most diversified portfolio with assets in multiple cities in several countries. This helps them reduce over-exposure in any one country or area.
There is also a high chance that dividends will be cut in the coming quarters. I foresee that dividend cuts will be in place till the 2H of FY21. I believe that by the 2H of FY21, the tourism and hospitality sector will already be on track to recover though it will take several months or even a year or two before they recover to pre-covid levels.
I personally have some positions in Ascott Residence Trust even before the COVID-19 crash and way before the acquisition of Ascendas hospitality trust. The reason why I invested was simple. I took a good hard look at their assets and thought to myself, “Hey, I would probably rent one of their serviced apartments or stay in one of their hotels”.
In my opinion, the main drive to a hospitality REIT’s success is that it must have fantastic assets and have a high occupancy rate. The more people that stay at their hotels or serviced apartments, the more income they get.
As always, you can take a look at my portfolio updates to see my current positions! P.S. I’m running a telegram chat group for you guys to share and discuss investment-related topics so come on in! I’ll be there too! You can join the chat here: https://t.me/joinchat/D4iHeEVapnGC1lWcFEupVw
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