3 risks you should consider before investing in Ascendas Hospitality Trust

Nomura warns Ascendas lacks experience in the hospitality segment.

Here's more from Nomura:

Consideration #1: Sponsor Ascendas lacks a track record in the hospitality segment
As mentioned earlier, Ascendas, the trust’s sponsor, lacks an established track record in hotel management.

Key mitigating factor: Ascendas is a key player in the SREIT management space; it has aspirations to branch out into mixed development projects
Ascendas had assets under management of nearly SGD12.9bn as of 31 March 2012, as it was managing two listed SREITS (AREIT and AIT). It has a significant presence in over 10 countries (including Singapore, China, India and South Korea). This is important, we believe, in terms of being exposed to deal flow as well as having local expertise and resources. Ascendas has demonstrated its aspirations to become a more well-rounded real estate developer, with its foray into mixed-development projects like Changi City. We believe Ascendas’ aspirations will lead to a future asset pipeline for ASHT.

Consideration #2: Variability in income flow due to the absence of a fixed floor
A predominantly management-contract lease structure leaves only c.7% of ASHT’s income fixed. While this would mean higher participation in future RevPAR growth, the flip side would imply higher vulnerability if RevPAR declines.Our forecast NPI margin for ASHT of 31- 35% is significantly lower than that for CDLHT. This is largely as a result of the different lease structures (master lease versus management contracts).

Key mitigating factor: Favourable supply conditions in key markets; Accor’s expertise as a leading hotel operator in Asia Pacific and Australia
Supply conditions remain tight in Sydney, a key city for ASHT and likely to account for 38% of FY14F NPI. JLL Hotel estimates that room supply will increase by only 3.1% over 2012-2013F. In addition, we believe that Accor’s expertise and leading position as a hotel operator should help boost ASHT’s hotel performance.

Consideration #3: Susceptibility to FX movements
ASHT’s portfolio composition and cross-border operations render it particularly susceptible to FX movements. Thus, revenue, NPI and distributable income may be negatively impacted should FX move against the trust.

Key mitigating factor: Management plans to hedge 100% of FY13/14F distributable income
Management has guided that 100% of distributable income in FY13/14F will be hedged. In addition, the targeted borrowing mix of 50% SGD, 34% AUD, 12% JPY and 4% CNY is intended to naturally offset a portion ASHT’s currency exposure.

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