In the beginning of the year, I have always wanted to review and reduce the holdings in my portfolio which is now currently at 13 companies. My intention is to identify the weak performers, flush them out and concentrate on those with quality fundamentals because it doesn't seem justifiable to spend the time and effort to monitor them.
Ascendas Hospitality Trust is one of those I have identified as weak performers and until today, I still think the management is not fundamentally strong enough that I can bet my money on to bring the company to greater heights.
I bought these shares during the IPO days at 88 cents and during these couple of years, I've received a fair amount of dividends, though they are still underwater at this point. Today, I have sold all 7 lots of AHT at a price of 68 cents.
In this post, I will just quickly touch on a few reasons why I decide to sell off the shares:
1.) Hedging Exchange Rate
Until today, I remain baffled to why the management did not hedge currency risk from the start knowing that the majority of their concentrations are from Australia and Japan and this would have impacted their earning distributions.
The management has only started to hedge after a couple of unfavourable currency movement impacting their bottomline and because of this today they are still incurring the cost of unwinding cross currency swap which will last until 4QFY15.
2.) Poor Capital Allocator
A good management is one who is able to create value for the shareholders through proper recycling of assets to purchase, divest or raise funds that would maximize the best interests of the shareholders. I posted in the previous article about the difficulty for Reits to retain earnings because of their distribution policy and all the more so this becomes an important factor especially for Reit managers.
AHT management is weak in this areas. For example, the placement exercise to raise funds to acquire the Park Hotel Clarke Quay and Osaka Namba Hotel were DPU destructive as they had to raise funds at the lower end range of the spectrum that could not meet the NPI yield sustained for the new hotels. Even though distribution income raised by about 25.2% compared to the previous year, the distribution per unit declined 3.9% as a result of increasing number of outstanding units.
This reminds me of the recent exercise for LMIRT which I have blogged here. When your share price is in a decline and you had to raise funds by further offering discounts to placement or rights issue, you are giving the investors a double whammy and destroying value, even if the acquisition is "accretive" when they say so in the pro-forma financial effect.
A good counter example of this would be Ascott Reit or Capitamall Trust. Like AHT or LMIRT, the management likes to raise funds to acquire new properties when the need arises. The difference is that the management would do well to push up the share price before raising equity so that gives both side a little room for breather.
3.) Capitalization Rate
Next, we take a look at the company's capitalization rate, which measures the efficiency of the management in extracting out the rental income from each hotels. This is taken by dividing the hotel's respective NPI by their asset valuation.
Since most of the concentrations of AHT's portfolio are in Australia, in particular Sydney, we will be focusing on that. Based on the FY13/14 report, the capitalization rate for its AU properties works out to be 7.83% (AUD 45.3 / AUD 578). This is above the average capitalization rate for Sydney and Melbourne which I have pulled from JLL. So this part looks rather satisfactory.
However, if we are comparing them against Stamford Land, their capitalization rate works out to be above 8%.
4.) Gearing / Dividend / Payout Ratio / Price-to-Book / Price-to-RNAV
Comparing some of the financial indicators against Stamford Land with similar profile, both of which I am vested, I get the following comparisons below.
| AHT | SL | |
|---|---|---|
| Gearing % | 38.3% | 38.8% |
| Dividend Yield % | 7.3% | 5.5% |
| Payout Ratio | 100.0% | 100.0% |
| Price-to-Book | 0.93 | 1.03 |
| Price-to-RNAV | 0.93 | 0.48 |
On one look, it doesn't appear too much different with AHT winning on the dividend yield portion. However, as previously mentioned in my SL post, the company is currently recording their assets under historical basis so by revaluing, they would do much better in terms of the gearing and Price-to-Book. The question is if the 1.8% spread in the dividend yield justifies paying the difference for the stock.
Final Thoughts
When people buy this share, the first thing they are usually interested in is the dividend yield and the second is the Ascendas brand. But looking beyond that, I'm sure the results for the past 2 years speak for itself and for myself, this has been a disappointing purchase. The situation in the past few years for Australia has not been the greatest, but I think some of their decisions have not been helping. Maybe under a different management, they could have done differently.
What about you? Are you vested in this share? What do you think of AHT?
