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How Does Ascott Residence Trust Diversify Its Portfolio?

Ascott Residence Trust (SGX: A68U) is Singapore’s largest hospitality REIT by market capitalisation. It has grown from a modest portfolio of S$1 billion in assets comprising 12 properties in 2006 to its current global portfolio of 75 properties worth S$5.5 billion (as at 31 December 2017).

Despite its size, Ascott Residence Trust’s focus on hospitality-related assets makes it susceptible to concentration risk. To reduce these risks, there are a few strategies that the trust uses to diversify its portfolio and income source.

Geographical diversification

Ascott Residence Trust is perhaps one of the most geographically diversified trusts in Singapore. The trust owns properties located around the world, including Barcelona, Brussels, Guangzhou, Hanoi, Jakarta, Kuala Lumpur, London, New York, Tokyo, Perth and Singapore, to name a few.

The geographical diversity of their properties limits its exposure to any single market. To illustrate this, below is a chart of the breakdown of the trust’s assets by geography.

Source: Ascott Residence Trust investor presentation

As you can see, there is no one market that contributes more than 20% of Ascott Residence Trust’s total assets. Its largest market, Singapore, makes up 17.9% of their portfolio.

Diversified types of properties

As mentioned earlier, the REIT focuses on investing in hospitality-related assets. However, within this sector, there are a few different types of properties. These include serviced residences, hotels, and rental housing properties.

Hotels earn revenue from rooms and other sources of income such as food and beverage, and convention and meeting room rental. It largely depends on the tourism industry and is predominantly seasonal in nature.

Macroeconomic conditions drive serviced residences and rental housing, which are part of the REIT’s portfolio, and these type of assets are usually leased out over a longer term. As the aforementioned two types of properties are so different and rely on varied economic factors, they provide a natural hedge for the trust.

Different leasing strategies

Ascott Residence Trust makes use of three leasing models to secure their income. First, there is the master lease contract where lessees pay a fixed rental per annum to the landlord. Around 29% of gross profit is earned from master lease contracts. The duration of these contracts are usually long and provide a stable income for the trust.

The second kind of contract is contracts that provide a minimum guaranteed income from lessees. There is a variable portion of the contract that lessees have to pay depending on the performance of the asset. 13% of the trust’s gross profit is earned through this form of contracts.

Finally, the bulk of Ascott Residence Trust’s gross profit is earned through properties on management contracts. A third-party is contracted to manage the properties for a fee. There is no guaranteed rental and income is based on the performance of the properties under contract. Around 58% of total gross profit is earned from such management contracts.

The Foolish bottom line

Ascott Residence Trust is one of the more established trusts in Singapore. Using these diversification strategies, the trust has been able to deliver stable returns to shareholders over its decade-long existence.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.