As many have expected, the spread of the Covid-19 pandemic has crippled both tourism and business travel around the world. As many countries experience a spike in the number of community infection cases, they have instituted country-wide lockdowns. This has impacted Ascott Reit greatly. Ascott Residence Trust (ART) is the largest hospitality trust in Asia Pacific with an asset value of S$7.4 billion as at 31 December 2019. Its business model is to invest in hospitality-related assets which can include serviced residences, hotels, rental housing properties etc.
In learning how to invest in Singapore, it is important to take note of the potential impact that world events such as these can have on the businesses that we invest in. As Ascott Reit has recently released a business update for 1Q2020. Here are some of the notable details.
1st Quarter 2020 portfolio revenue per available unit has declined by about 23% year on year due in large part to lower occupancy. Though lower, the portfolio occupancy still remains above break-even level and average daily rates are relatively stable. 18 of Ascott Reit’s properties have remained closed due to government mandate, with the majority of these properties in France. As every country had different Covid-19 restrictions, the occupancy and revenue performance varied across different countries. Revenue dropped by about 28% in Australia, 31% in China, 37% in Japan and 30% in Singapore.
Ascott Reit was somewhat buffered from the full impact of the crisis was due to the management contracts and master leases that they have in place. Of the 87 contracts that Ascott has with the property managers, 40% are master leases while 8% are management contracts with minimum guaranteed income.
Balance Sheet Strength
While revenue trends are important, difficult times like these make balance sheet strength pivotal when assessing if the company can continue to operate as a going concern. Ascott Reit has relatively low debt gearing at 35.4% with sufficient debt headroom of up to $2.1 billion if it fully utilise the 50% Debt/Asset limit that MAS has instituted. As a Reit, Ascott is a levered real estate play and thus it has to be able to pay its maturing debts. As of 31st March 2020, Ascott reit has about 404 million of debt due. This can be met by the SGD 300 million o hand and SGD 163 million in divestment proceeds. Hence, there is sufficient short term liquidity.
Even though Ascott Reit has sufficient cash to meet its short term requirements, it is aware of the short term challenges and have deferred uncommitted discretionary capital expenditure in the form of asset enhancement initiatives (AEI). Ascott Reit was supposed to carry out AEI for DoubleTree by Hilton Hotel New York- Times Square South but this has been delayed.
As Covid 19 cripples the entire aviation industry and leads to a rethink of both business and leisure travel, Ascott Reit’s performance will continue to be weak for the months to come. However, investors can take comfort in their balance sheet strength which reduces the risk of a corporate default due to short term liquidity crunches. That said, it is also important to realise that management contracts and master leases are often renegotiated or re-entered after a period of time and property managers will definitely request for lower rates or shorter leases to hedge against the tail risk of another pandemic situation when it is time to renew their contracts.