Ascendas Hospitality Trust (SGX: Q1P) closed at $0.64 yesterday. At that price, the trust is offering a distribution yield of 8%. That yield looks tasty, but there are two key points to note before you jump in.
1. It’s a stapled trust
Ascendas Hospitality Trust is structured as a stapled security whereby one stapled security consists of a pair of a real estate investment trust (REIT) and a business trust.
In a previous article, my fellow Fool Stanley Lim highlighted the difference between a REIT and a business trust. The key difference between the two is that the latter is ultimately not obligated to distribute any of its income, while the former has to pay out 90% of its distributable income to enjoy tax transparency.
In Ascendas Hospitality Trust’s case, around 65% of its distributable income for the financial year ended 31 March 2015 (FY2014/15) was housed under its business trust (A-HBT). The rest of it came from the REIT unit (A-HREIT).
Meanwhile, A-HBT also houses a bigger chunk of Ascendas Hospitality Trust’s borrowings. The stapled trust reported an overall gearing ratio of 38% as of 30 June 2015. Of this, A-HBT had a gearing of 43.2% while A-HREIT had a gearing of 28.8%. Notably, A-HBT has a voluntarily-adopted 60% aggregate leverage limit while A-HREIT’s leverage limit is governed by REIT regulations in Singapore.
2. It’s all about Australia right now
For FY2014/15, around 73% of the stapled trust’s revenue originated from Australia. In contrast, Singapore made up less than 7% of revenue.
The concentration of revenue in Australia makes the stapled security more sensitive to foreign exchange risks given that it reports and doles out distributions in the Singapore dollar. In the most recent quarter, gross revenue from Australia fell 5.4% year-on-year while net property income slipped by 1.6%.
The volatility in exchange rates may affect distributions from time to time, therefore investors should take note.
Ascendas Hospitality Trusts’ high distribution yield now may look tasty at first sight, but Foolish investors may want to dig deeper to understand the risks that come with it.
It’s not to say that the stapled security will definitely be a bad investment, but understanding the upside and risks that come along with the trust is an important part of the due diligence process before any investing decision is made.
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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.