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Why Has Ascendas Hospitality Trust’s Distributable Income Declined in Recent Months?

Ascendas Hospitality Trust (SGX: Q1P), or AHT for short, is a stapled trust that specialises in hospitality-related properties. It has a portfolio of 11 hotels, diversified across cities in Australia, China, Japan and Singapore.

Over the months from March to December 2017, the trust reported declining net property income. Consequently, income available for distribution to unitholders has also decreased by 3.5%. This is certainly a concern for unitholders. As such, I thought it would be useful to summarise some of the challenges that AHT has faced and what we can expect going forward.

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Higher operational expenses

During the last nine months, gross revenue for AHT came in at $170 million, 1.8% higher than the previous year. Despite this, net property income dropped by 1.9% to $72 million. Income available for distribution also decreased by 1.7% to $50.2 million. This was because of rising costs of operation, which lowered the NPI margin.

Australia portfolio facing headwinds

The Australia portfolio continued to face challenges in the last quarter as net property income for this geographical segment declined by 6.4% in Australian dollar terms. This is in spite of all three metrics of average occupancy rate, average daily rate and revenue per available room increasing.

Management stated that the reason for this is due to the impact of higher land tax and weaker convention business, decreasing the net property margin of the portfolio.

Strong Singapore currency

The trust was also negatively affected by the weakening of the Australian dollar and Japanese Yen against the Singapore currency. This was especially prominent in the third quarter of their financial calendar (1 October to 31 December 2017) where the Japanese yen depreciated 7% against the Singapore dollar.

Net property income for Japan was up 2.1% in Japanese yen terms, but in Singapore dollars, NPI decreased by 5.4%.

Going forward

In the third quarter ended 31 December 2017, AHT’s management said that it expects the hotel market in Sydney to remain healthy in the near term. However, Melbourne hotel market is expected to moderate due to an increase in supply over the next few years. The increased land tax will also continue to affect the Australia portfolio’s net property income margin over the longer term.

With that in mind, I do not expect AHT to be able to grow its DPU by a huge amount over the near term due to the growing challenges in the industry. The one thing that is positive for AHT, though, is its relatively low gearing ratio of 33%, and further debt headroom for acquisitions. If it is able to capitalise on this advantage to make acquisitions, unitholders might be rewarded with growth in distributions in the future.

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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.