CapitaLand Ascott Real Estate Investment Trust (“Ascott”) plans to issue SGD perpetual securities (“perps”) at the initial price guidance (“IPG”) of 4.90%. The perps will be issued on 7 August 2024, with the first call and reset date on 7 February 2030. If the perps remain uncalled, the coupon will reset based on the SGD 5-year SORA-OIS plus an initial spread determined upon issuance. The new issuance will be available for institutional and accredited investors only.
The new issuance of perps comes right after the announcement of the redemption of ARTSP 3.880% Perpetual Corp (SGD), which will be called on its first call date of 4 September 2024. Ascott indicated that the net proceeds from this issuance will be used to refinance the ARTSP 3.880% Perpetual Corp (SGD) bonds.
Ascott is currently the largest lodging trust across the Asia Pacific, with approximately SGD 8.5b in total assets under management. The 102 properties (as of 30 June 2024) under Ascott’s management are relatively well-diversified in terms of asset class. The majority are serviced residences (with 53 residences total), with the rest divided across hotels, rental housing and student accommodation. Concurrently, Ascott’s properties are diversified geographically across 16 different countries – with 54% in Asia Pacific, 26% in Europe and 20% in the United States as of 30 June 2024.
For the half-year ended 30 June 2024 (“1H24”), Ascott continues to see good business growth with revenue and gross profit increasing by +11% and +12% year-on-year (“YoY”) respectively. Revenue and gross profit rose to SGD 386.4m and SGD 172.9m in 1H24, up from SGD 346.9m and SGD 154.4m in 1H23 respectively. Ascott attributed this growth to stronger performance and contribution from new properties, albeit seeing some partial offsets from divestments and foreign exchange impact. Comparing on a same-store basis (this excludes the new acquisitions and divestments), gross profit still saw a +3% growth YoY.
Meanwhile, Ascott continues to record growth in its Revenue per available unit (“RevPAU”). RevPAU grew +4% YoY to SGD 145 in 2Q24, increasing to 102% of the pre-COVID 2Q19 pro forma RevPAU. Ascott noted that this is largely due to increased room rates while average occupancy remained mostly stable at 75%. Additionally, Ascott highlighted that its key markets – Japan and US led this growth in RevPAU.
With that said, Ascott saw a -10% YoY drop in net income, falling from SGD 94.0m in 1H23 to SGD 84.3m in 1H24., Ascott was impacted primarily by higher finance costs (+29% YoY) and a net loss for foreign exchange of SGD 6.3m (as compared to SGD 14.7m net gain in 1H23) despite the higher gross profit in 1H24. The net income does not include Ascott’s profit from divestments in 1H24, amounting to SGD 26.5m, as compared to SGD 0.041m in 1H23.
Despite the impact from elevated interest rates, Ascott’s credit profile stands largely stable. We observed a considerable increase in its effective borrowing cost, from 2.4% as of 31 December 2023 to 3.0% as of 30 June 2024. However, we see only a slight drop in Ascott’s interest coverage ratio, from 4.0 times to 3.7 times across the same period – likely offset by a higher gross profit and EBITDA. Meanwhile, Ascott’s gearing (net debt to net assets) remains stable at 37.2% as of 30 June 2024, as compared to 36.9% as of 31 December 2023.
Table 1: ARTSP perpetuals against perps of similar years to next reset
Issuance | Ask Price | Yield to Next Reset | Years to Next Reset | Next Reset Date and Rate |
ARTSP Perpetual Corp (SGD)* | 100.00 | 4.90%* | 5.50* | 7 February 2030 Prevailing SGD 5Y SORA-OIS + Initial Spread |
98.05 | 5.34% | 0.92 | 30 June 2025 Prevailing 5Y SOR + Fixed Spread (2.5%) | |
101.23 | 4.46% | 4.87 | 12 June 2029 Prevailing SGD10Y SOR + the Initial Spread (2.737%) + step-up margin (100 bps) | |
99.19 | 4.44% | 6.86 | 9 June 2031 Prevailing SGD 10Y SOR + Initial Spread (2.735%) + coupon step-up of 100bps | |
Sources: Bloomberg Finance L.P., Bondsupermart, iFAST Compilations. | ||||
Ascott is rated BBB (Stable) by Fitch Ratings and the new issuance is expected to be unrated. Investors ought to note the subordinated structure of the new issue – the perp will be ranked below Ascott senior bonds in the event of a company default. In addition to this, we wish to highlight that the final price guidance is likely to adjust downwards from the IPG.
Ascott’s new issuance appears fairly priced against other perps of similar tenors to their next call. In particular, for investors who might have a keen interest in Ascott’s perps, the ARTSP 3.070% Perpetual Corp (SGD) might be a better consideration given the relatively higher yield and short 0.92 year to next call.
However, we remain cautious on perps given the heightened non-call risk since the beginning of the rate hike cycle. Elevated interest rates have made it difficult for issuers to call back their perps, especially if it is economically unviable for them to do so. As such, investors should continue to strongly consider the possibility of a non-call and whether such a situation remains suitable for their investment portfolio.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in ARTSP 3.070% Perpetual Corp (SGD) and KEPSP 2.900% Perpetual Corp (SGD), and the analyst who produced this report hold a NIL position in the abovementioned securities.
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