CapitaLand Ascott Trust announces 5Y SGD senior unsecured bond at IPG of 4.50%

CapitaLand Ascott REIT, together with CapitaLand Ascott Business Trust, form the stapled group of CapitaLand Ascott Trust (“ARTSP”), formerly known as Ascott Residence Trust. ARTSP announced the intention to issue a 5-year senior unsecured bond at the initial price guidance (“IPG”) of 4.50%. The bond is expected to be issued on 6 September 2023, with a maturity date of 6 September 2028. 

ARTSP is rated BBB (Stable) by Fitch Ratings, while the issuance is expected to be rated BBB by Fitch. It stated that the net proceeds will be used for refinancing existing borrowings of the company and its subsidiaries.

ARTSP is currently the largest lodging trust in the Asia Pacific region, with an asset value of SGD 8.1b and market capitalization of SGD 3.7b as of 30 June 2023. ARTSP’s international portfolio comprises 107 properties with more than 19,000 units in 47 cities, across 15 countries in Asia Pacific, Europe and the United States of America.

Looking at the portfolio composition by geography, the main bulk of ARTSP’s assets are in Asia Pacific (59%), followed by the Americas (21%) and Europe (20%). It also has diversified lodging asset classes, with 57 serviced residences, 18 hotels, 23 rental housing properties and 9 student accommodation assets. 

With the COVID pandemic quickly becoming a distant memory, travel volumes all around the globe have been recovering steadily, reaching 80% of pre-pandemic levels in 1Q23, leading to increase in demand for hospitality. In light of this, ARTSP seeks to capture growth with the resumption of travel, by setting a target asset allocation of 70-75% in serviced residences and hotels across the globe. They also plan to allocate the remaining 25-30% of the assets to longer-stay accommodation, which are resilient and counter-cyclical in nature, to provide a stable income base.

From ARTSP’s first half-year business update (“1H23”), revenue and gross profit grew 30% and 31% year-on-year (“YoY”) respectively in 1H23, driven by strong performance and income contribution from both growth income sources (42%) and stable income streams (58%).

Growth income sources (hotels and serviced residences) performed admirably, with portfolio revenue per available unit (“RevPAU”) growing 20% YoY and almost recovering to pre-COVID 2Q19 pro forma RevPAU levels (98%). Strong operating performances can be primarily attributed to higher average daily rates (“ADR”) surpassing pre-COVID levels, with the core markets of ARTSP (Australia, Japan, Singapore, UK and the USA) performing above pre-COVID same-store pro forma RevPAU levels for 2Q23. Performance in the other markets (China and Vietnam) also strengthened from 1Q23 to 2Q23, with same-store RevPAU increasing to 78% and 83% of 2Q19 levels respectively.

Stable income sources (master leases, management contracts with minimum guaranteed income (“MCMGI”), rental housing and student accommodation) also recorded strong performance in 1H23. Occupancy of rental housing and student accommodation properties remained stable above the 95% level, while European properties under MCGMI recorded RevPAU above pre-COVID levels in 1H23. Master leases also saw increased gross profit by 9% YoY through higher variable rents and contribution from new properties.

ARTSP’s credit profile also remains solid, with a gearing ratio of 38.6% and approximately SGD 1.8b worth of debt head room (calculated based on gearing limit of 50%). Interest coverage ratio (adjusted for perpetual securities) also remained stable from 2H22 to 1H23 at 3.6x. Currently, there is low refinancing risk as well, with only 13% of debt due to be refinanced in 2023.  Its debt load remains manageable for now, with plenty of time for ARTSP to look for options to refinance the large bulk of debt maturing in 2027 onwards. Sufficient hedging has been implemented, with interest-rate swaps used to ensure 80% of debts are on fixed rates, providing some downside protection against potential interest rate hikes. Lastly, ARTSP remains liquid with SGD 1.11b of available funds, consisting of SGD 414.0m of cash on-hand and SGD 700.0m of available credit facilities.

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SGD senior issuances from banks

Although the IPG is in the 4.50% area, we expect it to dip to around the range of 4.20% to 4.30% for the final price guidance. Comparing to existing bonds from ARTSP and other similar issuers within the hospitality sector, we believe that this new issue looks fairly priced at its IPG of 4.50%.

With the strong pent-up demand for travel, driven by the reopening of international travel, ARTSP will continue to benefit through its growth income sources in the form of hospitality assets and travel accommodation. Its stable income base of longer-stay properties will also provide downside protection against the volatile nature of hospitality demand, building up the resiliency of ARTSP’s profit . With a relatively decent credit and liquidity profile, coupled with an expected bond credit rating of BBB from Fitch, investors who are looking for a investment-grade bond can consider this new issue from ARTSP.

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 the analyst who produced this report hold a NIL position in the abovementioned securities.

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