Ascendas Hospitality Trust (AHT) has been actively acquiring hotels since they recycled capital via the sale of two Beijing hotels in Jan this year.
The latest acquisition is the Ibis Ambassador Seoul Insadong, for a purchase amount of about S$94.5 million. It is a 363 room hotel built in 2013, sitting on freehold land near the major tourist attractions of Geongbuk Palace, Bukchon Hanok Village, Insadong cultural district and Changdeukgung Palace.
This comes hot on the heels of recent acquisitions in 2018:
- Acquisition of KY Heritage Hotel Dongdaemun in Apr
- Acquisition of three WBF hotels in Osaka, Jun
As a second Seoul hotel acquisition this year, it seems that management is confident of the Seoul tourism market recovery, after the Korea-China Thaad missile row spurring a strong growth in China tourists arrivals.
In the first nine months this year, China tourists number is up by 9.4%. This is important because year-to-date as of Sept, China tourists constitute 31.3% of the total visitors arrival, according to Korea Tourism website.
|Growth in China tourist arrivals. Source: AHT presentation|
Management also stated that Korea has stepped up tourism marketing efforts to South East Asia countries to reduce reliance on visitors from few key markets.
I verified some figures in Korea Tourism website and it appears to be true, as percentage of tourists form Japan (2nd biggest), Taiwan (3rd biggest) and South East Asia had been growing in the past four 9-mth period from 2015 – 2018.
- Japan: 13.9%, 12.8%, 17.3%, 18.8%
- Taiwan: 3.9%, 4.8%, 7.0%, 7.5%
- SEA (Thai, Msia, Philippines, Indo, Spore): 9.7%, 9.8%, 11.8%, 11.6%
Naturally what is of concern to investors would be whether this acquisition is distribution accretive. For this we refer to pro forma Distribution table below as set out in the acquisition announcement.
|Source: AHT Acquisition announcement|
Should we compare just column 1 (before the string of divestment of Beijing hotels and this year’s acquisitions), and column 2 (effect of just this acquisition), there would be a 1c increase, or a measly 0.17% growth, in distribution.
But should we lump this year’s active divestment and acquisitions together, the effect which is shown in third column, would be a jump in DPU to 6.35 cts, a meaningful 8.3% increase.
The fact is this is a small acquisition. The hotel valuation is approximately S$97.6m, just 5% of total portfolio valuation of $1.63b as of 31 Mar 18. This should be view as a incremental acquisition as part of the bigger asset re-configuring exercise – to exit China market and enter Japan and South Korea. The split of Master Lease and Management Contract properties is also brought to a more balanced equal portion.
|Asset portfolio before and after Beijing divestment, Osaka and Seoul acquisition. Source: AHT presentation|
Similarly, NAV maintains based on just this acquisition alone. However, taken with the bigger picture of recent divestment and acquisitions, NAV increased from 92c to $1.02, while maintaining a marginal increase in gearing from 30.8% to 31.1%. It is a commendable exercise from the NAV and gearing perspective.
|Source: AHT Acquisition announcement|
Looking into the Cap Rate of this property seems to show that this acquisition is a better deal than the previous Seoul hotel acquisition, although they are not too far off. Based on this asset’s NPI of $4.32m and purchase consideration of $94.5m, cap rate is about 4.6%. The Dongdaemun hotel was bought for $90.1m and a $3.619 NPI in FY16/17, hence a cap rate of 4.01%.
However, one needs to know that AHT’s latest quarterly earning did not show many positives. In the 2Q FY18/19, gross revenue and NPI shrank 11.9% and 7.5% year-on-year. This is due to challenging market conditions in Australia and a weaker AUD against SGD. Similar trend was also observed in first quarter with 9+% drop in revenue and NPI. This is an issue as Australia constitute almost half of the total portfolio.
The newly acquired properties in Osaka and Seoul would have to fulfill their growth expectations to pick up the slack caused by weak Australian properties. Park Hotel Singapore, also need to contribute riding on the tourism sector growth ahead – expected increased tourists arrivals and recovering room rates.
Prospective investors also need to note that hospitality is the most unpredictable and least defensive among the REITs sectors. There are many factors, unexpected, unforeseen and sometimes unheard of, that can cause room rates to plunge in a short time.So do enter with both eyes open.
With a trailing twelve months distribution of 5.94c, its current yield is about 7.4%. With this yield, it does compensate me sufficiently for the inherent risks that come with a hospitality REIT. Plus the recent expansion into new markets, I am willing to buy into this REIT and monitor its next 1 year crucial performance closely.
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