Date: 1 October 2024
Broker: OCBC Investment Research
Company Overview
CapitaLand Ascott Trust (CLAS), previously known as Ascott Residence Trust, is the largest lodging trust in the Asia Pacific region. As of 30 June 2024, it has a diversified portfolio of 102 properties, including hotels, serviced residences, rental housing, and student accommodation across 45 cities in 16 countries. CLAS has an asset value of SGD8.7 billion as of 31 December 2023, and its properties operate under brands like Ascott, Somerset, Quest, and Citadines. The trust is listed on the Singapore Exchange since March 2006 and is part of the FTSE EPRA Nareit Global Real Estate Index Series.
Proposed Acquisition of lyf Funan Singapore
On 1 October 2024, CapitaLand Ascott Trust announced the proposed acquisition of lyf Funan Singapore, a co-living property, at an agreed property value of SGD263 million. This acquisition is expected to be funded by earlier divestment proceeds from Citadines Mount Sophia Singapore (completed in March 2024) and a combination of debt.
Acquisition Highlights
- Total Cost: The total acquisition outlay of SGD265.1 million includes:
- Purchase consideration of SGD146.4 million
- SGD113 million of loan repayment
- SGD3.1 million in professional fees
- SGD2.6 million in acquisition fees (paid in stapled securities)
- Debt Funding: CLAS will take on SGD119.7 million of debt, which is expected to increase its aggregate leverage from 37.2% to 39.1% on a pro forma basis as of 30 June 2024.
Financial Impact
The acquisition is expected to be accretive to distribution per stapled security (DPS). The EBITDA yield of lyf Funan is projected at 4.7%, which is 150 basis points higher than the exit EBITDA yield of Citadines Mount Sophia Singapore. This translates to a projected 1.5% increase in FY23 DPS, from 6.57 to 6.67 Singapore cents, yielding 6.7% based on the last closing price of SGD0.99 as of 31 December 2023.
Revised Fair Value Estimate
OCBC has revised the fair value (FV) estimate for CLAS to SGD1.10 (from SGD1.08), driven by a lower risk-free rate assumption of 2.50%, despite an increase in beta to 0.99. CLAS’s exposure to long-term stay properties, like student accommodation and rental housing in markets such as the US and Japan, adds stability to its income, despite economic cycles. The proposed acquisition increases the proportion of Singapore assets from 16% to 19% and positions CLAS well for long-term growth and sustainability.
ESG Considerations
CLAS has faced a downgrade in its ESG rating as of June 2024, primarily due to concerns about corporate governance practices, particularly related to higher-than-average employee turnover and recurring related-party transactions with its controlling shareholder. However, CLAS continues to demonstrate strong business ethics and has ample opportunities for green investments, with 37% of its portfolio certified to green building standards by FY23.
Key Financial Metrics
FY23-FY25 Projections:
- Gross Revenue (SGD): FY23 – 744.6m, FY24E – 780.5m, FY25E – 805.0m
- Gross Profit (SGD): FY23 – 338.2m, FY24E – 356.9m, FY25E – 370.9m
- DPS (S cents): FY23 – 6.57, FY24E – 5.83, FY25E – 6.24
- Gearing: FY23 – 37.9%, FY24E – 35.3%, FY25E – 35.4%
Investment Risks
- Macroeconomic Slowdown: A downturn in the global economy could reduce demand for business and corporate travel.
- Competition: Increased competition from new lodging supply in key markets.
- Foreign Exchange Fluctuations: Potential risks from unfavorable currency movements.
Investment Thesis
CapitaLand Ascott Trust offers a resilient and geographically diversified portfolio that benefits from both stable and growth income sources. Its focus on long-term stay properties ensures a degree of protection from cyclical economic changes, and its ongoing portfolio rejuvenation—exemplified by the acquisition of lyf Funan—enhances its long-term growth potential. The acquisition, if approved, is expected to be a key catalyst for increasing returns and sustaining investor interest.
