Ascott Reit's whirlwind merger to lead the global hospitality space

Singapore

IT took a matter of three days for the proposed S$1.2 billion merger between Ascott Residence Trust (ART) and Ascendas Hospitality Trust (A-HTrust) to be approved and unveiled to the public.

The merger of the two Reits had been subject to much speculation since January after ART's parent, CapitaLand - one of Asia's largest real estate companies - announced its S$11 billion acquisition of Ascendas-Singbridge, A-HTrust's parent.

The merger of the parents to become one of Asia's largest diversified real estate players, with over S$123 billion of assets under management (AUM), has resulted in an overlap in investment mandates between their two trusts. Regulation-wise, there is no reason for CapitaLand to retain two hospitality vehicles.

Beh Siew Kim, chief executive officer of Ascott Residence Trust Management which manages ART, made the first move as the acquirer in May. But talks went full steam ahead after the completion of the parents' union.

"Many didn't expect it to be so fast because the announcement of the completion of CapitaLand and Ascendas-Singbridge merger was made end-June and on July 3, we announced this proposed combination," she told The Business Times in an interview on Friday.

"We practically only went to Ascendas side just prior to the completion of the merger of CapitaLand and Ascendas-Singbridge on the possibility of us coming together," Ms Beh said, recounting the sleepless night before July 3.

Before the merger was tabled, Ms Beh spent many long nights with her team to do the "leg work" which involved a comprehensive study of properties, structures and tax considerations, among others, to come out with a trust scheme that will give birth to the largest hospitality trust in the Asia-Pacific and the eighth biggest globally.

Financially, the deal had to make sense and tick all the right boxes for unitholders of both Reits. If not, unitholders are not going to vote in favour of the transaction at the respective extraordinary general meetings later this month.

ART, which operates its serviced residences mostly under the Ascott, Citadines and Somerset brands, will see its asset value grow by 33 per cent to S$7.6 billion and distribution per unit (DPU) increase by 2.5 per cent for FY 2018 on a pro forma basis.

The pro forma gross revenue for the combined entity for FY 2018 will increase by 37 per cent to about S$705 million, while the pro forma FY 2018 gross profit will increase by 36 per cent to about S$325 million.

"Within Singapore, we will be two-and-half times larger than the next hospitality Reit, which is CDL Hospitality Trust. So, it propels us in size and scale. Within Asia-Pacific, we will be one-and-a-half times larger than the next hospitality trust. That puts us in a very advantageous footing in the hospitality space," Ms Beh said.

It will have access to a larger capital base and a higher debt headroom of about S$1 billion, giving it greater financial flexibility to seek more accretive acquisitions and value enhancements.

"When you create something this big, you put yourself in a better financial position to grow further. You now have a bigger war chest, higher debt headroom, the potential to be included in the FTSE EPRA Nareit Developed Index and see higher trading volume as seen in precedent cases. These will then lower your costs of capital and allow you to grow even further," Ms Beh noted.

She believes the combined entity will be "the first stop for those who want to divest their hospitality assets" given its stature as Asia-Pacific's largest hospitality trust and backing by a strong sponsor in CapitaLand, which will own about 40 per cent in it.

"The purpose of combining the two trusts is so that we can continue to grow and that we have the capacity to do that - grow organically from existing portfolio or inorganically through new acquisitions," she said.

Ms Beh sees opportunities beckoning within the lodging space, including student accommodation, and with a global mandate in serviced residences, rental housing and other hospitality assets, the Reit will not be restricted to just buying Singapore assets.

The combined Reit boasts of 88 properties in 39 cities scattered over 15 countries in Asia-Pacific, Europe and the United States, with each property contributing less than 5 per cent to gross profit.

"What does this mean? If you look at a hospitality trust with only exposure to Hong Kong, occupancy is now very low and a lot more volatile. But ART is global, half of our income comes from master leases which are stable. From unitholders, they are assured in terms of stability of returns from the Reit," she explained.

The Reit has no trophy assets it intends to cling on to. The portfolio is reviewed every quarter to decide on which to keep, further enhance or recycle to unlock value for unitholders.

With Asia leading global growth, witnessing a boom in tourism as well as a burgeoning middle class, asset allocation will remain Asia-Pacific-centric. Post-merger, Asia-Pacific will make up about 70 per cent of the Reit's total portfolio valuation and contribute 68 per cent of its gross profit.

"That combination is almost like a marriage made in heaven," Ms Beh added. "We still want an allocation that is more Asia-Pac-centric. 60:40 in favour of Asia-Pac. That has always been our strategy."