What Would Warren Buffett Think Of Ascott Residence Trust?

Property companies have many qualities that Warren Buffett looks for in a good investment. He once said that investing is about forecasting the yield on an asset over the lifetime of the asset. So provided he can reliably forecast the yield on a property asset, he might just give it the thumbs-up.

Ascott Residence Trust (SGX: A68) is the hospitality arm of CapitaLand (SGX: C31). It generates revenues through 90 properties in 38 cities across 14 countries. These include London and New York in the west to Shanghai and Singapore in the east.

Ascott has over the last decade delivered a median bottom-line profit of S$139 million. Last year’s Net Income was an above average S$165 million. The relatively-low earnings volatility could be a plus in the eyes of Buffett.

The margins are quite high too, which could be a positive. The average Net Income Margin has been around 37%. However the low Asset Turnover of 0.1 could be a detractor. Buffett likes to see companies make good use of its assets. But it is important to bear in mind that property companies, by their very nature, are asset-heavy.

Buffett wants companies that have low exposure to macroeconomic risk. In other words, he wants companies to have strong balance sheets that are not affected by interest-rate movements. Ascott had Total Assets of S$4.9 billion and Total Liabilities of S$2.2 billion, which equates to a Leverage Ratio of 1.8, which should not be too onerous.

As a test of value, Buffett also looks at the market value of a company compared to its intrinsic value. With a share price of S$1.14, Ascott Residence Trust is valued at a 30% discount to its Net Assets. It means that investors are buying a dollar worth of assets for 70 cents.

Ascott Residence Trust ticks many of the boxes that Buffett would consider to be important when assessing a investment. He is unlikely to be disappointed by what he sees.

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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 Director David Kuo doesn’t own shares in any companies mentioned.