Singapore REITs, or S-REITs, have seen recovery over the last month or so as investors turn to the resilient asset class to hedge against the inflationary pressures and potential recession.
I have previously written about 3 of the S-REITs that have just recently increased their distributions per unit (DPUs) after their latest earnings announcements.
This is as a key strategy for dividend investors to consider involves focusing on the growth of the DPU, or dividend, given it’s a powerful indicator of potential income, performance, and reliability.
Today, instead of focusing on those REITs that have raised their DPU, I wanted to write an article on one that’s nearly certain to increase it substantially in 2023: CapitaLand Ascott Trust (SGX: HMN).
By focusing on CapitaLand Ascott Trust, or simply CLAS, investors can position themselves to capture the upward momentum of the rebounding hospitality sector, along with the potential for a substantial increase in DPU.
Here are some of the key reasons why I believe CLAS could increase its DPU significantly in FY2023.
1. Strong travel momentum
The United Nations World Tourism Organization (UNWTO) reported that an estimated 235 million tourists travelled internationally in the first quarter of 2023, more than double the same period of 2022.
The resilience of the tourism recovery continues in 2023 as revised data for 2022 shows over 960 million tourists travelling internationally last year, representing 66% of pre-pandemic levels.
As economies reopen and travel resumes, CLAS – which is the largest lodging trust in Asia Pacific with an asset value of S$8.0 billion as of 31 December 2022 – is poised to see an influx of pent-up demand, boosting its revenue and, in turn, its DPU.
Its assets are predominantly used as serviced residences, rental housing properties, student accommodation and other hospitality assets in various countries.
As of 31 December 2022, CLAS’s international portfolio comprises 105 properties with more than 18,000 units in 47 cities across 15 countries in Asia Pacific, Europe and the US as of 31 December 2022.
2. Recovery continues for RevPAU
CLAS demonstrated a strong recovery in their portfolio’s Revenue Per Available Unit (RevPAU), showing a year-over-year increase of 90% to S$127 in the first quarter of 2023 (Q1 2023).
This recovery equates to 93% of the pro-forma pre-pandemic levels.
Key markets for CLAS, including Australia, Japan, Singapore, and the US, performed at or above pre-pandemic levels.
Notably, the RevPAU in Japan experienced a significant leap of 351% year-over-year to ¥12,166 (representing 105% of pre-pandemic levels on a same-store basis), following the country’s reopening to independent leisure travellers in October 2022.
3. Healthy growth in longer-stay properties
There was healthy growth observed from longer-stay properties.
Excluding recently-acquired properties, gross profit saw an organic year-over-year increase of 53%.
These longer-stay properties contributed to 19% of CapitaLand Ascott Trust’s gross profit for Q1 2023, while maintaining a robust occupancy rate of over 95%.
4. Resilient balance sheet
CLAS has managed to maintain a resilient balance sheet despite the rising interest rate environment over the last year.
Its gearing ratio stood at 38.7% as of March 2023 while its average cost of debt crept higher to 2.3%.
Despite that, the REIT’s interest coverage ratio remains at a healthy level of 4.4 times.
The management has also managed to mitigate the impact of rising interest rates as 75% of its total debt is pegged to fixed rates.
5. Return of Chinese tourists
Since China fully reopened its international borders and resumed visa issuance to foreigners in March 2023, inquiries from Chinese guests have surged.
It is worth noting that prior to the COVID-19 pandemic, Chinese guests accounted for 9% of the trust’s guest count.
CLAS’s key markets, such as Japan, Singapore and Australia, which contributed to 17.5%, 17.1% and 12.7% of total assets, respectively, will be benefit from the return of Chinese travellers.
Before the pandemic, Chinese nationals constituted 25-30% of visitor arrivals in Japan, 19% in Singapore, and 15% in Australia.
Aside from that, the increase in flight capacity is expected to facilitate the return of Chinese tourists.
As of January 2023, global airlines are operating at just 11% of pre-pandemic capacity levels for flights to and from China.
By April 2023, flight capacity is projected to increase to 25% so there’s still plenty of capacity to come online.
Strong DPU growth and attractive valuation
CLAS is one of the top S-REIT picks in the hospitality industry.
Currently, it is trading at a 12-month forward distribution yield of 5.7%, based on a potential increase of 7% in its DPU in FY2023.
According to consensus, CLAS has a 12-month target price of S$1.29, representing an increase of 20.6% from its current level of S$1.07.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
