Ascott Residence Trust (SGX: A68U) is Singapore’s first and largest hospitality REIT, with assets valued at S$5.7 billion as of 31 March 2019. Its portfolio consists of 74 properties with over 11,700 units in 37 cities across 14 countries in Asia-Pacific, Europe, and the US. ART has just announced a proposed combination with Ascendas Hospitality Trust (SGX: Q1P), which will create a combined entity with an asset value of S$7.6 billion. AHT has a diversified portfolio of 14 quality hotels valued at around S$1.8 billion, located in key cities in Australia, Japan, South Korea, and Singapore.
The total consideration for the combination is S$1.235 billion and comprises payment of cash of 5.43 Singapore cents per share to each holder of AHT shares as well as 0.7942 units in the Ascott Reit-BT Stapled Units issued at S$1.30 per share. This adds up to around S$1.0868 per unit for AHT unitholders, which is a decent 10.9% premium to AHT’s last traded price of S$0.98.
This combination is subject to shareholders’ approval for both ART and AHT, but here are four reasons I think this proposal is attractive for unitholders.
1. Distribution per unit accretion
The combined entity will result in the asset base for Ascott Residence Trust growing by 33% to S$7.6 billion, and distribution per unit (DPU) is also projected to increase by 2.5% for FY 2018 to 7.34 Singapore cents on a pro-forma basis. Based on the last traded share price for ART of S$1.30, this will increase the historical dividend yield for the new trust to 5.6% from 5.5% previously.
2. Entry into the FTSE EPRA Nareit Developed Index
With a new combined free float of S$2.4 billion, Ascott Residence Trust will then be qualified to be included in the FTSE ERPA Nareit Developed Index, as the index threshold for inclusion is for a REIT or business trust to have a free float of at least S$1.7 billion. This index is managed by FTSE Russell, and it is the aim of the European Public Real Estate Association (EPRA) to promote, develop, and represent the European Real Estate sector.
Entry into this index would result in higher trading liquidity, and it may also trigger an upward re-rating for the REIT as its investor base would also expand.
3. Stronger Asian presence and lower overall risk
Ascott Residence Trust will have a stronger Asian presence, with 71% of its portfolio of properties located in Asia-Pacific, up from 60% before the combination. As Asia is widely recognised as the fastest growing economic region and is experiencing a boom in tourism, this positions the REIT for better growth prospects.
Ascott Residence Trust’s portfolio risk concentration metrics will also be reduced, with no single country accounting for more than 20% of gross profit, which is a strong positive for unitholders.
4. Larger size provides access to greater growth opportunities
The larger asset size for Ascott Residence Trust will provide it with increased capacity to undertake larger development or conversion projects, compared to a smaller entity that may not have the financial muscle. The combined entity’s pro-forma aggregate leverage will be 36.9%, which offers higher absolute debt headroom for pursuing mergers and acquisitions as the statutory gearing limit for REITs is currently capped at 45%.
CapitaLand guns for better synergies
Investors should note that this announcement comes just two days after CapitaLand Limited (SGX: C31) concluded its S$11 billion acquisition of Ascendas-SingBridge. With that acquisition, Ascendas’ stable of REITs would come under CapitaLand’s portfolio. This proposed combination merely brings two of CapitaLand’s entities together to form a larger, more diversified business trust with better economies of scale.
Unitholders of both ART and AHT can look forward to better synergies with this combination along with the four benefits described above. They should, therefore, see this as a positive and vote for the combination at the upcoming extraordinary general meeting.
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Editor's note: This article has been edited to replace "Ascott REIT Business Trust (ARBT)" with "Ascott Residence Trust".
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of CapitaLand Limited and Ascott Residence Trust. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.