Hey there, savvy investors! Welcome back to ‘The Dividend Uncle’. Today, we’re diving deep into why I’m making a substantial $10,000 investment into CapitaLand Ascott Trust right now.

Given the recent poor performance of REITs, with the benchmark CSOP iEdge S-REIT Leaders ETF dropping nearly 15% year-to-date, many might wonder why now is the right time. But I believe in the long-term potential of REITs as a reliable source of passive income for my retirement portfolio. Typically, I stick to dollar cost averaging into quality REITs, but the market downturn in REITs has dragged CapitaLand Ascott Trust’s share price down more than 10% year-to-date, to below $0.90. This presents an attractive opportunity that’s too good to pass up!

Before we dive into the details, I want to introduce you to an incredibly useful website for all REIT investors: REIT-tirement.com, run by my buddy Vince. This site offers almost every piece of data you need to evaluate your REIT investments, such as dividend yield, price to net asset value or NAV, gearing ratio, percentage of fixed debt. And the best part? It’s free and updated almost instantly when new data becomes available. Vince also provides comparative analyses of similar REITs and a comprehensive list of all REIT-related articles and videos. If you enjoy conducting your own analysis of REITs, you’ll find REIT-tirement.com to be an invaluable resource.

Now, I must let you know that the content of this post is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Now, let’s dive right into our today’s post.

Why CapitaLand Ascott Trust Stands Out Among the Blue-Chips

With REITs experiencing a significant downturn this year, many blue-chip REITs are now trading at attractive levels. Amid this landscape, CapitaLand Ascott Trust stands out as particularly compelling. Here are the reasons why I believe it’s the best blue-chip REIT to invest in right now.

1. Strong Operational Environment: Sustained Tourism Recovery

CapitaLand Ascott Trust is ideally positioned to benefit from the ongoing recovery in tourism. Some might argue that the tourism recovery is relatively old, with “revenge travel” all but done by this point in time. But one key factor that the recovery will continue is the resurgence of Chinese tourists, who have been slower to return but are now catching up, adding momentum to the travel industry. Additionally, an increasing number of events, such as the upcoming Paris Olympics and various high-profile concerts driving the new trend of “concert tourism”, are set to drive tourism further. These factors support a sustained growth outlook for the trust’s portfolio of properties.

Even if tourism and business travel were to stabilize at their current levels, the trust’s high dividend yield, which I’ll discuss next, remains attractive. The robust income generated provides a safety net, ensuring that investors like me can enjoy strong returns regardless of how fast the travel sector grows.

2. Highest Dividend Yield Despite No Substantial Risks

Another compelling reason for my investment is the attractive dividend yield of 7.3%. This yield is significantly higher compared to other safer blue-chip REITs like CapitaLand Integrated Commercial Trust, Frasers Centrepoint Trust, and CapitaLand Ascendas Trust, which are yielding at 6% and below. Even though some blue-chip REITs, such as Mapletree Logistics Trust and Mapletree Pan Asia Commercial Trust, offer yields closer to 7.3%, they are facing greater challenges and risks. Mapletree Logistics Trust is dealing with issues related to Chinese logistics properties, and Mapletree Pan Asia Commercial Trust is contending with a challenging retail environment in Hong Kong. In contrast, CapitaLand Ascott Trust does not have such substantial risks on the horizon, making its high yield even more attractive.

Compared to CapitaLand Ascott Trust’s historical dividend yields, the current yield of 7.3% stands out as the highest since the onset of the Covid-19 crisis, with only one brief exception in 2022. During the pandemic, travel came to a virtual halt, and hotels were primarily used as quarantine centers. This context underscores the exceptional attractiveness of the current yield, highlighting the trust’s strong recovery and the potential for sustained income in a stabilizing market.

Before moving on the next point, guess where this chart is from? Yes, it’s from the REIT-tirement website that I shared earlier. Definitely valuable information.

3. Attractive Valuation

As an extension to the point on dividend yield, CapitaLand Ascott Trust’s price to net asset value (or NAV) ratio of 0.79 is particularly attractive. This is significantly lower compared to other safer blue-chip REITs, which have price-to-NAV ratios ranging between 0.9 and 1.12. Even some REITs facing challenges and risks have similar or higher valuations. This low price-to-NAV ratio means investors can acquire high-quality assets at a discount, offering significant upside potential as the market eventually recognizes the true value of the trust.

Compared to its own price-to-NAV ratio over the past 5 years, it is also among the lowest, other than during Covid-19 crisis.

4. Proactive and Strategic Management

CapitaLand Ascott Trust’s management team is highly proactive in optimizing the portfolio. They have a clear strategy to enhance value by divesting older properties that require significant capital expenditures and acquiring newer, high-potential assets. Recently, the trust has been actively involved in negotiations for several potential acquisitions, reinforcing its commitment to rebalancing the portfolio.

For instance, the trust acquired Teriha Ocean Stage, a rental housing property and concurrently divested five properties in the first quarter of FY2024, all at premiums above book value, securing net gains of over $25 million. The proceeds from these sales have been used to pay down higher interest rate debt, demonstrating prudent financial management and improving the trust’s balance sheet.

Potential Risks to Note

1. Economic Uncertainty and Potential Slowdown in Tourism

Global economic conditions, including potential recessions or slowdowns, can impact the tourism and hospitality sectors, which are closely tied to the trust’s performance. If central banks around the world are too slow to cut interest rates due to fears of reigniting inflation, it could dampen economic activity. Since tourism is closely correlated with the economy, this risk cannot be ignored. A downturn in tourism would impact the trust’s earnings and, consequently, its dividend yield.

2. Market Volatility Further Drags Down Share Price

The recent performance of REITs, including the benchmark CSOP iEdge S-REIT Leaders ETF’s significant drop year-to-date of about 15%, indicates market volatility and poor investor sentiments towards REITs. While I believe in the long-term potential, short-term fluctuations can affect the value of the investment.

3. Interest Rate Fluctuations

REITs are sensitive to interest rate changes as they tend to be highly leveraged. If the US Fed does not cut its interest rates this year, or even raise interest rates, REITs’ borrowing costs will rise and pressure profit margins and distributions.

However, CapitaLand Ascott Trust’s strong balance sheet and proactive management mitigate this risk to a certain extent. Notably, 82% of the Trust’s debt is fixed, and only a small proportion of its debt is maturing in 2024, reducing the immediate impact of interest rate hikes. But in the longer term, interest rates will remain the biggest risk for the Trust.

The Dividend Uncle’s Take

Despite these risks, I see CapitaLand Ascott Trust as a compelling investment for several reasons. The sustained recovery in tourism, combined with the trust’s proactive portfolio management, creates a strong foundation for future growth. The high dividend yield and attractive valuation further enhance the appeal. While market volatility and economic uncertainties are concerns, the long-term potential and strategic positioning of CapitaLand Ascott Trust make it a worthwhile investment.

I’m putting my hard-earned $10,000 into this trust, and I’m already halfway there. I’ll continue to invest as I monitor its performance over the next few weeks.

So, there you have it – the reasons why I’m investing $10,000 into CapitaLand Ascott Trust right now. This decision aligns with my belief in the long-term potential of REITs as a source of passive income for my retirement portfolio. Although this post is a bit longer than usual, I wanted to ensure that we covered all the important details to help you make well-informed decisions.

Stay smart, stay invested, and I’ll see you in the next one!