Welcome to the second part of the article on Ascott Residence Trust (SGX: A68U). In my previous article, I covered the sources of revenue, and sales growth for the trust over the past five financial years. In this article, I’d like look at the gross profit and debt profile of the logistic warehouse owner. As a recap: Ascott Residence Trust is a real estate investment trust (REIT) that mainly owns serviced residences or rental housing properties. The REIT is managed by a wholly-owned subsidiary of Capitaland Limited (SGX:C31). As of 31 December 2014, it had 90 properties with 10,502…
Welcome to the second part of the article on Ascott Residence Trust (SGX: A68U). In my previous article, I covered the sources of revenue, and sales growth for the trust over the past five financial years. In this article, I’d like look at the gross profit and debt profile of the logistic warehouse owner.
As a recap: Ascott Residence Trust is a real estate investment trust (REIT) that mainly owns serviced residences or rental housing properties. The REIT is managed by a wholly-owned subsidiary of Capitaland Limited (SGX:C31). As of 31 December 2014, it had 90 properties with 10,502 apartment units in 37 cities.
The REIT has beaten the market in the past five plus years, providing total returns — including dividends and rights issue — of about 57%. In comparison, the capital gain return of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was around 17% for the same duration.
A closer look
Ideally, we would like to see the revenue dollars drip down to the bottom line. For that, we look into the gross profit of the properties. The gross is defined as the revenue minus all direct expenses.
Source: REIT Earnings Report
The financial year and calendar year coincide for Ascott Residence Trust. As mentioned in my previous article, the REIT’s revenue can be organized in three different buckets: master leases, management contracts with minimum income guarantee, and management contracts. The first two buckets provide more income stability.
Over the period above, overall gross profit for Ascott Residence Trust has grown at an annualized compounded growth rate of 15.5% – slightly faster than revenue growth. It is perhaps no surprise that master leases, and management contracts with minimum guaranteed income make up the bulk of the gross profit growth. As of the end of 2014, the two segments make up close to 50% of gross profit for the REIT.
Source: REIT Earnings Presentation
From the two graphs above, we can see that close to half of Ascott Residence Trust’s gross profit comes from Japan, France and United Kingdom. Similarly, a large part of gross profit growth also comes from the three countries above over the time period of five years. Again, 89% of gross profit is derived from countries outside the shores of Singapore.
Finally, Foolish investors might want to keep up an eye with the REIT’s debt profile. The debt profile may provide clues on how the REIT is funded, and its sensitivity to the interest rate environment. To do that, we can look at the latest quarterly earnings presentation for the quarter ended 31 December 2014.
|Interest cover ratio||4.3 times|
|Weighted Average Debt to Maturity||4.4 years|
|Fixed Rate Borrowings||80%|
|Effective Borrowing Rate||3.0%|
|Total borrowings||$1.56 billion|
Source: REIT’s earnings presentation
On 27 October 2014, Ascott Residence Trust issued S$150.0 million in fixed rate perpetual securities. This debt issuance may come at a higher interest rate cost but gives more predictability in the cost of financing for the REIT. A test in flexibility of funding will come in the financial year 2015 and 2016, when about 33% of its loans progressively become due. The progress in refinancing of debt is where Foolish investors should keep a watchful eye.
Ascott Residence Trust offers a globally diversified portfolio of properties which relies in part on overall business travel, and the expatriate population in various countries. Over the course of five years, the REIT has grown from 38 properties at the start of 2010 to 90 properties at the end of 2014. The growth in properties has seen Ascott Residence Trust expand its revenue and gross profit at rates close to 15% per year. That said, being a REIT which relies on corporate spend can expose it to revenue declines during recessions if companies cut back on spending. For instance – in 2009 – revenue for the REIT declined by almost 9% from the previous year during the Great Financial Crisis.
Moving forward, the Foolish investor might want to keep an eye on the quality of assets that are included into Ascott Residence Trust in the future, and how the REIT will finance its growth.
Ascott Residence Trust last traded at S$1.29 last Friday. This translates to a historical price-to-book ratio of 0.94 and a distribution yield of around 6.3%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.