Ascendas Hospitality Trust (SGX: Q1P), or AHT, is a hospitality-focused trust in Singapore. It has a portfolio of 11 properties located in Australia, China, Japan and Singapore. Some prominent properties in its portfolio include Novotel Sydney Central, Park Hotel Clark Quay and Novotel Beijing Sanyuan.
Since the start of 2017, investors have turned bullish about Ascendas Hospitality Trust, propelling the trust’s security price from $0.71 to its current price of $0.82. This is perhaps due to the overall optimism surrounding REITs and hospitality sector in general. Even after the price rise, AHT still boasts an attractive distribution yield of 6.7% and has a reasonable price to book ratio of 0.9.
That said, despite the optimism surrounding the trust, and the relatively attractive distribution yield, I have noticed some concerning trends that unitholders should at least keep an eye on.
Limited gross revenue growth
Over the past three years, AHT has not been able to meaningfully increase its gross revenue earned from its existing portfolio. In fact, its gross revenue dipped to S$224.4 million in FY2016/17, from S$227.1 million in FY2014/15 (the REIT’s financial year ends on 31 March each year).
The trust did not fare much better over the most recent 9-month ended on 31 December 2017 either, as gross revenue only inched up by 1.8% from a year ago. The was largely due to a 2.1% decline in the gross revenue earned from its Australia portfolio.
Widening operating expenses
The last nine months was particularly challenging for AHT as it faced higher operating expenses and consequently had lower net property income (NPI) margins. This meant that despite the 1.7% uptick in gross revenue from the previous year, NPI still declined by 1.9%.
The drop was again due to the poor performance from its Australia portfolio due to larger expenses and cost. NPI of the Australia portfolio declined by 6.4% in Australian dollar terms. Management cited that a higher land tax in Melbourne and increasing operational cost in Brisbane were partly to blame for the decline in NPI.
Challenging macroeconomic conditions in Australia
Lastly, AHT is likely to continue to face headwinds to its Australia portfolio. The hotel market in suburban Sydney is expected to face pricing pressure from increased competition. Melbourne will also have an increased supply of hotels in the coming year. Furthermore, the reopening of the International Convention Center Sydney will pose further competition for the conference and events segment of AHT’s Australian businesses.
With 53% of net property income coming from the properties in Australia, these macroeconomic headwinds in this geographical sector may have a significant impact on the trust’s overall profitability.
The Foolish conclusion
Despite the optimism surrounding AHT, there are still many challenges ahead for the trust. Investors should not overlook these trends as these could result in lower revenue for the trust and, consequently, smaller distributions for unitholders.
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