Introduction

CapitaLand Ascott Trust (CLAS) is a distinguished player in the real estate investment trust (REIT) sector, focusing on income-producing properties such as serviced residences, rental housing, student accommodations, and hospitality assets worldwide. As of January 28, 2025, UOB Kay Hian retains its “BUY” recommendation for CLAS, emphasizing its remarkable portfolio reconstitution strategy and strong financial standing.

Company Overview

CLAS, a dominant figure in the real estate sector, boasts a market capitalization of S\$3.34 billion (US\$2.48 billion) with a current share price of S\$0.88 and a target price of S\$1.38, offering a significant upside potential of 56.8%. The trust is backed by major shareholder Temasek Holdings, holding a 33.6% stake. CLAS operates in key geographical markets, including Singapore, Japan, Australia, the UK, France, and the US, among others.

2H24 Financial Highlights

The second half of 2024 marked a turning point for CLAS as its reconstituted portfolio began to deliver promising results. CLAS reported a 9% year-on-year (yoy) increase in Revenue Per Available Unit (REVPAU) to S\$176 in Q4 2024, surpassing pre-pandemic levels by 13%. The strong growth was driven by key markets such as Japan (+37% yoy), Singapore (+15% yoy), Australia (+11% yoy), and the UK (+10% yoy).

Revenue rose by 6% yoy to S\$423.2 million, while gross profit climbed 8% yoy to S\$198 million. However, the distributable income marginally declined by 4% yoy to S\$134.8 million due to a 15% increase in finance costs. The Distribution Per Unit (DPU) for 2H24 stood at 3.55 Singapore cents, down 7% yoy. Adjusted for non-periodic items, DPU increased by 3% yoy to 3.08 Singapore cents.

Market-Specific Performance

Japan

Japan emerged as a star performer, with REVPAU soaring by 37% yoy in Q4 2024. The year-end holiday season coupled with a weak yen spurred international leisure travel, pushing occupancy rates for rental housing above 95%. Gross profit from master leases for hotels rose by 14% yoy, driven by variable rents. The outlook for Q1 2025 remains positive as international demand continues to grow.

Singapore

Singapore also delivered robust growth, with a yoy REVPAU increase of 15% in Q4 2024. The Robertson House, following its renovations, contributed significantly to the gross profit, which rose by 13% yoy. However, demand is expected to soften in Q1 2025 due to the absence of high-profile events like Taylor Swift concerts and the biennial Singapore Airshow. The recent acquisition of lyf Funan is anticipated to contribute positively starting Q1 2025.

Australia

Australia benefitted from domestic travel driven by concerts and sports events, resulting in a 10% yoy increase in REVPAU in Q4 2024. The Australian Open and F1 Grand Prix are expected to sustain this momentum in Q1 2025. CLAS plans to undertake asset enhancements for The Cavendish London and Sydney Central Hotel in 2025-26.

United Kingdom

The UK also showed strong performance, with REVPAU growing 10% yoy in Q4 2024, thanks to the refurbishment of Citadines Holborn-Covent Garden. Demand was bolstered by the year-end holiday season and corporate short stays. Sydney Central Hotel is set for renovations in 2025-26, which could further enhance its value.

Portfolio Reconstitution and Capital Recycling

CLAS has demonstrated exceptional capabilities in portfolio reconstitution and capital recycling. In October 2024, it divested the Citadines Karasuma-Gojo serviced residence in Kyoto and Infiniti Garden rental housing in Fukuoka for S\$53.1 million and S\$108 million, respectively, achieving sales prices 40% and 55% above book value. In total, CLAS clocked cumulative divestment gains of S\$74 million in 2024, with the divestment of Somerset Olympic Tower in Tianjin expected to complete in Q2 2025.

Financial Projections and Valuation

CLAS is projected to invest S\$130 million in asset enhancement initiatives in 2025-26, focusing on The Cavendish London and Sydney Central Hotel. Despite potential unevenness in operating income due to divestments and renovations, CLAS plans to distribute non-periodic divestment gains to maintain stable distributions. The trust offers an attractive 2025 distribution yield of 6.9%.

UOB Kay Hian has raised its DPU forecasts by 3% for 2025 and 4% for 2026, estimating distributions of S\$10 million in divestment gains annually. The target price of S\$1.38 is based on a dividend discount model (DDM) with a cost of equity of 7.25% and a terminal growth rate of 2.8%.

Key Risks and Catalysts

Risks include uneven income due to divestments and increased finance costs. On the flip side, key catalysts include continued recovery in leisure and corporate travel, yield-accretive acquisitions, and successful execution of asset enhancement initiatives.

Conclusion

CapitaLand Ascott Trust continues to excel in creating shareholder value through strategic portfolio reconstitution and disciplined capital recycling. With a positive outlook across key markets and an attractive 56.8% upside potential, CLAS remains a compelling investment opportunity. UOB Kay Hian reaffirms its “BUY” recommendation for this high-performing REIT.