CLAS Deep Dive: Can a Hospitality REIT Really Become More Resilient?

[00:00:00]Can a hospitality REIT really become more resilient? Hospitality REITs have always been one of the most fascinating but hated sectors for dividend investors. When travel is booming, they can deliver some of the strongest recoveries in the REIT sector. But when the economy slows, they are often among the first to feel the impact. Due to the higher volatility, many investors avoid hospitality REITs altogether.

[00:00:23]That made me wonder something while researching Capital and Ascott Trust or CLASS. Over the past few years, management has been making some rather interesting decisions. They've been expanding into rental housing and student accommodation, increasing the proportion of stable income, selling mature assets, and steadily reshaping the portfolio. At first glance, these all look like separate initiatives, but the deeper I looked, the more I realized they were all trying to solve exactly the same problem. Can a hospitality REIT actually become more resilient? Today, we're going to use CLASS to answer that question.

[00:00:59]Welcome back to the Dividend Uncle, where I share my personal research over a cup of coffee.

[00:01:04]But before we start, a reminder that this video is for informational purposes only and not financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. I own some of the shares and REITs discussed here, but what works for me might not work for you. All right, let's get started.

[00:01:23]Why hospitality REITs are different.

[00:01:25]Before we talk about CLASS, I think we first need to understand why hospitality has always been one of the most challenging sectors within the REIT universe. Let's compare it with a typical office building. An office landlord signs a tenant on a three or five-year lease. Assuming the tenant remains financially healthy, the landlord already has a fairly good idea of the rental income that property will generate over the next few years.

[00:01:48]Industrial properties are similar.

[00:01:50]Logistics warehouses often have leases stretching three, five, or even 10 years. Retail REITs typically have shorter leases, but anchor tenants frequently stay for many years.

[00:02:01]Hospitality doesn't work like that.

[00:02:03]Hotels don't lease out rooms. They sell them. That might sound like a small difference, but I actually think it's the single biggest reason hospitality REITs behave so differently from every other property sector. Every morning, after guest checkout, the hotel effectively starts the day at zero occupancy. Every room has to be sold again, every single day. That means revenue depends on factors that management can influence, but never completely control. Will tourists continue arriving? Will businesses cut travel budgets? Will airlines reduce flights? Will a major event bring thousands of visitors into the city?

[00:02:39]Will a competitor open a brand new hotel nearby? Unlike an office landlord collecting contracted rent, a hotel operator competes for demand every single day, and that creates a very different business. Hospitality REITs don't simply own real estate. Through their operators, they also run businesses. That's why investors pay close attention to metrics like occupancy, average daily rate, or ADR, and revenue per available unit, or RevPAR. These operating metrics tell us how efficiently the underlying hotels are attracting guests and converting demand into revenue. When travel demand is strong, these numbers can improve very quickly, but they can also deteriorate just as quickly when conditions change. That's the first source of volatility. A second challenge most investors overlook.

[00:03:27]There's another structural challenge that receives far less attention. Hotels don't just compete for guests, they compete against time. Think about the last hotel you stayed in. You probably noticed the room design, the bathroom, the mattress, the lobby, perhaps even how modern the check-in process felt.

[00:03:44]Now, imagine returning to that same hotel 15 years later without a single major refurbishment. Meanwhile, two brand new competitors have opened just down the road. Would you still choose the older hotel? Probably not. Unlike warehouses or office buildings, hotels don't age gracefully. Guest expectations evolve. Brands refresh their standards.

[00:04:05]Technology improves. Design trends change. Eventually, every successful hotel reaches the same conclusion. It has to reinvest, not because management wants to spend money, but because remaining competitive depends on it. And here's where hospitality becomes particularly challenging. Renovating a hotel often means temporarily taking rooms, or sometimes the entire property, offline. Revenue falls immediately, but debt still needs to be serviced. Staff still need to be paid. The renovation itself costs money. In other words, hospitality REITs face two structural realities. First, their earnings are naturally more volatile because room revenue resets every single day. Second, maintaining long-term competitiveness requires periodic asset enhancement initiatives, or AIEs, which can temporarily reduce earnings while they are being carried out. Once I understood those two challenges, I started looking at Class very differently. Because the more I researched the trust, the less I felt management was trying to eliminate volatility. Instead, it seemed they were asking a different question. How do you build enough resilience around volatility so that it no longer dominates the business? And I think that's where the real story of Class begins.

[00:05:18]Looking at Class through a different lens.

[00:05:21]At first glance, Class looks like exactly what you would expect from a global hospitality REIT. As at the end of 2025, it owned 103 properties, representing more than 18,000 units across 45 cities in 16 countries, with total assets of approximately 8.9 billion Singapore dollars. It is the largest lodging trust in the Asia-Pacific region, with well-known brands such as Ascott, Citadines, Somerset, Quest, and Lift operating across its portfolio. If we stop there, we'd probably describe Class as a large, globally diversified hospitality REIT, and we'd be right. But, I don't think we'd understand the business. Because if management's goal was simply to own more hotels, many of the decisions they've made over the past few years become surprisingly difficult to explain. Why deliberately increase exposure to rental housing? Why acquire student accommodation? Why maintain such a high proportion of master leases and minimum guaranteed income contracts when variable hotel income could potentially produce stronger upside during travel booms? Why continue selling mature assets and reinvesting elsewhere instead of simply collecting rental income?

[00:06:29]Eventually, I realized I was asking the wrong question. The real question wasn't, "What properties does Class own?" It was, "What problem is management trying to solve?" That question changed how I interpreted almost every decision in the annual report.

[00:06:45]The turning point. Class wasn't always built this way. The trust originally listed in 2006 as Ascott Residence Trust, focusing primarily on serviced residences. Even then, the business model was already somewhat different from traditional hotel REITs. Serviced residences typically catered to guests staying for weeks or months rather than just a few nights. Corporate relocations, project teams, and families on extended stays generally produce longer average stays and more stable occupancy than short-term leisure travel alone. The biggest transformation came in 2019, when Ascott Residence Trust merged with Ascendas Hospitality Trust to form today's Capitaland Ascott Trust.

[00:07:24]The merger dramatically expanded both the scale and diversity of the platform.

[00:07:29]Then, only months later, COVID brought global travel to a standstill. I actually think that period is one of the most important chapters in understanding today's Class. Because crises have a habit of exposing weaknesses that aren't always obvious during good times. COVID reminded every hospitality owner of one uncomfortable reality. When people stop traveling, hotel earnings can disappear remarkably quickly. I don't think management looked at that experience and concluded that hotels were a bad business. Instead, I think they asked a much better question. How do we make the next crisis less painful than the last one? As I pieced together the trust's acquisitions, divestments, contract structures, capital allocation decisions and portfolio evolution over the past few years, one pattern gradually became clear. These weren't separate initiatives. They were different answers to the same question, and that's when the strategy finally clicked for me. I started thinking about Klaus through what I now call the three layers of resilience.

[00:08:27]Layer one, cash flow resilience.

[00:08:30]Different demand drivers create more resilient cash flow.

[00:08:34]One question kept coming back to me while researching Klaus. If you were running this business after experiencing the biggest disruption the hospitality industry had seen in decades, what would you actually do? One option would be to simply wait for travel to recover.

[00:08:48]Another would be to buy more hotels and hope the next decade looks better than the last. But there was a third option.

[00:08:55]Instead of asking how to grow the portfolio, ask how to make the portfolio less dependent on a single source of demand.

[00:09:02]And I think that's exactly the question Klaus has been trying to answer over the past few years.

[00:09:07]Looking beyond property types.

[00:09:09]Most investors describe Klaus by listing the assets it owns, hotels, serviced residences, student accommodation, rental housing. That's factually correct, but I don't think it's the most useful way to understand the business, because management isn't simply buying different property types. They're buying different demand drivers. That sounds like a subtle distinction. I actually think it's one of the most important ideas in this entire research.

[00:09:35]Hotels remain the growth engine.

[00:09:37]Let's start with the obvious. Hotels remain the largest contributor to class, and I think that's exactly how it should be. Hotels provide something very few other real estate sectors can, operational leverage. When international travel recovers, hotels can increase room rates almost immediately. Office landlords generally wait years for lease renewals. Industrial landlords face the same limitation. Hotels don't. That flexibility creates upside, but it also creates volatility. Every morning, occupancy effectively resets. Every room has to be sold again. Hotels remain the engine of the portfolio. Management isn't trying to replace them. They're trying to make sure the entire trust isn't dependent on them alone.

[00:10:20]A different type of demand, serviced residences.

[00:10:24]Once I looked beyond hotels, I realized every other major asset class was solving a different problem. Take serviced residences. Many investors simply think of them as hotels with kitchenettes. In reality, they're serving a completely different customer, corporate relocations, project teams, expatriates, families between homes, medical travelers. Guests often stay for weeks or months rather than nights. That creates longer booking visibility and generally more stable occupancy.

[00:10:53]Properties such as Ascott Orchard Singapore illustrate this well. The demand isn't driven purely by tourism.

[00:10:59]It's driven by corporate mobility.

[00:11:01]Already, we've moved beyond one source of demand.

[00:11:05]Student accommodation.

[00:11:06]Next comes student accommodation. This is where I think management made one of the more interesting strategic decisions. Universities don't stop operating because GDP slows. Academic calendars continue. Students still need accommodation. Purpose-built student housing therefore follows a very different demand cycle from hotels. A good example is The Standard at Columbia, located near Columbia University in New York. Students aren't choosing between this property and a beach resort. They're choosing whether they need accommodation for the academic year. The demand driver is education, not tourism. That distinction matters.

[00:11:42]Rental housing. Then we come to rental housing, especially in Japan. One sentence changed how I thought about this business. People postpone holidays.

[00:11:51]They rarely postpone needing somewhere to live. Rental housing introduces another completely different demand driver, residential demand. Class has steadily increased exposure to Japanese rental housing, including several freehold residential acquisitions in greater Tokyo. Why Tokyo? Because it combines deep rental demand, limited developable land in key districts, and consistently high occupancy. Management isn't abandoning hospitality. They're balancing it.

[00:12:19]When the pieces come together.

[00:12:21]Once you put all of those pieces together, the strategy becomes much easier to understand. Hotels depend largely on travel. Serviced residences depend more on corporate mobility.

[00:12:32]Student accommodation depends on education. Rental housing depends on residential demand. Different assets, different customers, different economic drivers. That's far more meaningful than simply saying the portfolio is diversified. It's diversified in why people use the assets, and that's a much stronger form of diversification.

[00:12:52]The numbers begin to tell the story.

[00:12:54]Interestingly, the financial results reflect that evolution. By FY 2025, approximately 65% of Class gross profit came from relatively stable income sources, not just because of the property mix, but also because of how those properties are contracted. Master leases, minimum guaranteed income contracts, living sector assets. Each reduces dependence on purely variable hotel income. I think this is one of the most revealing metrics in the entire annual report, because management isn't merely talking about resilience. They're gradually changing the earnings mix to support it. Understanding the contract mix.

[00:13:32]Let's make this practical. Imagine two otherwise identical hotels. Hotel A earns purely variable income. If tourism is booming, earnings rise quickly. If tourism weakens, earnings fall just as quickly. Hotel B operates under a master lease. The operator pays an agreed rental amount regardless of daily occupancy, subject to the lease agreement. Income immediately becomes more predictable. Then there are minimum guaranteed income, or MGI, contracts.

[00:14:01]These combine elements of both. There's participation in the upside during stronger years, but there's also a contractual floor during weaker periods.

[00:14:09]No contract removes risk entirely, but every contract changes where the risk comes from. That's exactly what management has been doing across the portfolio.

[00:14:19]Why the living sector target matters.

[00:14:21]This also explains one of management's medium-term objectives. Today, the living sector represents roughly 17% to 18% of the portfolio. Management wants that to increase to around 25% to 30% over time. Initially, I thought this was simply another asset allocation target.

[00:14:39]Now I think it's much more than that.

[00:14:41]It's another step towards diversifying the trust's earnings drivers. Hotels ask one question every morning. Will someone stay tonight? Rental housing asks a different question. Will someone renew next year? Neither model is inherently better. They're simply exposed to different risks, and bringing those risks together inside one portfolio creates something that's much harder to achieve through hotels alone.

[00:15:05]Layer two, portfolio resilience.

[00:15:08]Great hotels don't stay great by accident. If layer one was about making cash flow more resilient, layer two is about protecting where that cash flow comes from. Because even the best hotel has one unavoidable enemy, time. One of the easiest mistakes investors can make is assuming that a successful hotel will remain successful simply because it's in a good location. Hospitality doesn't work that way. Every year, guest expectations change, design trends evolve, technology improves, new competitors enter the market. A hotel that looked premium 10 years ago may feel dated today. Unlike an office building where tenants often stay for years regardless of whether the lobby has been refurbished, hotels compete for customers every single night. That means today's competitive advantage gradually erodes unless management keeps reinvesting in the asset. In hospitality, standing still often means moving backwards.

[00:16:03]Why hospitality is different. Let's compare two property sectors. An industrial warehouse can often operate successfully for decades with relatively modest refurbishment. A hotel can't.

[00:16:14]Guests notice everything. The room design, the mattress, the shower, the lighting, the breakfast, even how quickly they can check in. Every detail influences guest satisfaction.

[00:16:25]Eventually, those details influence occupancy, then room rates, then RevPAR, then distributions. That's why I no longer think of asset enhancement initiatives as extraordinary events. I think of them as an essential part of owning hospitality assets. The objective isn't simply to maintain the building, it's to protect the hotel's ability to generate cash flow over the next decade.

[00:16:48]That completely changed how I interpreted Class renovation program.

[00:16:52]Following the money.

[00:16:54]Once I started looking at Class through that lens, another question naturally followed. Where does the capital for all of this come from? There are several possibilities. Management could simply borrow more. That increases financial risk. Management could reduce distributions. Income investors probably wouldn't appreciate that. Or management could continually refresh the portfolio itself. That's where I think Clause has been particularly disciplined. Portfolio renewal in practice.

[00:17:21]During FY 2025, Clause completed major asset enhancement initiatives in Paris and Seoul while simultaneously recycling capital across the portfolio. Management also announced several new rental housing acquisitions in greater Tokyo, continuing its strategic expansion into the living sector. At the same time, mature properties in markets such as China and Japan were divested at premiums of above book value. Notice the pattern. Management [clears throat] isn't simply buying and selling properties. Every transaction appears to support a broader objective. Older assets are monetized, capital is released. Some of that capital supports portfolio renewal. Some supports acquisitions into more resilient demand drivers. Some helps maintain distribution stability while hotels temporarily come offline for refurbishment. Viewed individually, they look like unrelated transactions. Viewed together, they look like one continuous capital allocation strategy. A better way to think about capital recycling.

[00:18:20]Personally, I don't particularly like the phrase capital recycling. It sounds transactional, almost mechanical. The more I studied Clause, the more I thought a better description would be portfolio renewal because that's really what's happening. The portfolio isn't static. It's constantly evolving. Older assets make way for newer opportunities.

[00:18:41]Hotels are repositioned. Living sector exposure gradually increases. Asset quality improves. That's very different from simply collecting rent.

[00:18:50]An orchard, not a museum.

[00:18:52]The analogy that helped me understand this was an orchard. Imagine owning hundreds of fruit trees. Some are newly planted. Some are producing their best harvest. Some are becoming less productive. If your objective is simply to maximize this year's harvest, you'll probably keep every tree. But if your objective is to maximize harvest over the next 20 years, you'll gradually replace older trees with younger ones.

[00:19:15]Your harvest might temporarily decline while those new trees mature, but eventually the orchard becomes healthier. I think Class approaches its portfolio in much the same way. Hotels aren't preserved like museum pieces.

[00:19:28]They're continually renewed. Looking beneath the headline DPS.

[00:19:33]This brings us to one of the more interesting aspects of FY 2025. On the surface, distributions per staple security remained unchanged at 6.10 cents. That's reassuring, but let's look beneath the headline. Core DPS, which reflects recurring operating performance, was approximately 5.35 cents. The difference, about 0.75 cents, or roughly $1 in every $8 distributed, came from non-periodic items, including realized gains from divestments. At first glance, that might sound concerning. After all, asset sales aren't recurring operating income, but context matters. Several hotels were undergoing A&A during the year.

[00:20:15]Operating earnings were temporarily affected. Those realized gains helped bridge that transition. The important question, therefore, isn't whether realized gains were used. The important question is why they were used. Were they supporting a structurally weak business, or were they helping smooth the temporary disruption created by renewing high-quality assets? Those are very different situations. How does this compare with peers? One concern some investors may have is whether Class is unusually reliant on non-periodic items.

[00:20:45]Interestingly, the broader hospitality REIT sector suggests otherwise. Take CDL Hospitality Trusts. Major refurbishments at W Singapore and Grand Millennium Auckland affected earnings while those properties were undergoing upgrades. Or Far East Hospitality Trust. Changes in distributions from other gains also influenced reported DPS. In other words, A&A disrupting earnings is not unique to Class, nor is the use of capital components or realized gains to help smooth distributions during periods of portfolio renewal. The difference lies in execution. Does management simply distribute gains, or does it simultaneously strengthen the portfolio?

[00:21:25]That's what I'll continue monitoring.

[00:21:27]What success looks like.

[00:21:29]Personally, I don't think the right metric is whether realized gains continue appearing. The real test comes later. As completed IA's reopen, does core DPS recover? Do renovated hotels achieve stronger room rates, higher occupancy, better RevPAR? Does the portfolio become demonstrably stronger than before? Those are the questions that determine whether today's capital allocation decisions genuinely create long-term value.

[00:21:55]Layer three, execution resilience.

[00:21:58]Great strategies need great platforms.

[00:22:01]By this point, we've looked at how Class has diversified its cash flows. We've also seen how management continually renews the portfolio instead of allowing hotels to gradually lose their competitiveness. On paper, both ideas make a lot of sense, but there's one question we haven't answered yet. Why has Class been able to execute this strategy consistently, while many smaller hospitality REITs find it much harder? Because strategy is only half the story. Execution is where long-term value is created. Scale creates optionality. Most investors think scale simply means owning more assets, more hotels, more countries, more rooms.

[00:22:39]That's certainly true, but I don't think that's why scale matters. I think scale creates something much more valuable about options. Let's imagine two hospitality REITs. The first owns 10 hotels. The second owns more than 100.

[00:22:53]Now, imagine one hotel requires a major refurbishment. For the smaller REIT, around 10% of the portfolio suddenly stops contributing meaningfully to earnings. That's painful. For Class, the impact is much smaller. Management can stagger renovations across countries.

[00:23:09]Different assets mature at different times. Capital can be redirected between markets. No single property determines the fortunes of the entire trust. As at the end of FY 2025, Class owned 103 properties representing more than 18,000 units across 45 cities in 16 countries with approximately 8.9 billion Singapore dollars of assets under management.

[00:23:33]Those numbers matter, not because bigger is automatically better, but because bigger gives management more strategic flexibility. Scale doesn't guarantee better returns. It gives management more options, and I think that's one of the most underrated competitive advantages in hospitality.

[00:23:49]The platform behind the portfolio.

[00:23:52]Another advantage isn't immediately visible from the balance sheet. It's the operating platform behind the assets.

[00:23:58]Class isn't simply a landlord collecting rent. It sits within the broader Capitaland ecosystem with The Ascott Limited managing one of the world's largest lodging platforms. That brings together globally recognized hospitality brands, established operating systems, corporate client relationships, revenue management capabilities, distribution channels, and local operating expertise across multiple markets. Those capabilities are difficult to quantify, but they're equally difficult to replicate. When Class acquires a new asset, it isn't building an operating platform from scratch. It's plugging another asset into an ecosystem that already exists. I think that's a meaningful competitive advantage over the long term.

[00:24:40]Financial flexibility is part of the strategy.

[00:24:43]Of course, execution also requires capital. Hotels need refurbishment.

[00:24:48]Acquisitions require funding.

[00:24:50]Divestments take time. Without a strong balance sheet, many of the strategies we've discussed simply wouldn't be possible. On the surface, Class appears conservatively financed. At the end of FY 2025, aggregate leverage stood at 37.7% approximately 78% of borrowings were fixed rate. Average borrowing costs remained around 2.9%. Interest coverage was approximately 3.0 times. Taken together, those numbers suggest management entered FY 2026 from a position of financial strength, but I think there's one nuance that's worth exploring.

[00:25:25]Looking beyond the headline gearing ratio, most investors stop at the reported gearing ratio. Personally, I think it's useful to take one additional step. Like many Singapore REITs, Class has perpetual securities outstanding.

[00:25:39]Under accounting rules, perpetual securities are classified as equity.

[00:25:43]That's why they don't appear in the reported gearing calculation.

[00:25:47]Economically, however, they still represent a permanent financing obligation. The distributions on those securities must be paid before ordinary stapled security holders receive their distributions. During FY 2025, Class issued approximately 260 million Singapore dollars of perpetual securities carrying a 4.2% distribution rate, largely to refinance an earlier issuance. If we include those perpetual securities alongside borrowings, total financing obligations increase from approximately 3.19 billion Singapore dollars to around 3.45 billion Singapore dollars. Against total assets of 8.9 billion Singapore dollars, adjusted leverage rises from the reported 37.7% to approximately 39%. Now, here's the important part. Does that change my investment thesis? Personally, no. 39% is still a comfortable level of leverage. The adjustment doesn't suddenly make Class highly leveraged.

[00:26:46]What it does remind me is that headline ratios rarely tell the whole story. As investors, I think our job isn't simply to memorize financial ratios. It's to understand what sits behind them.

[00:26:57]Execution is about discipline.

[00:27:00]One thing that struck me throughout this research was that management hasn't chosen the simplest path. In fact, they've arguably chosen a more complicated one. Multiple countries, multiple lodging formats, different contract structures, continuous portfolio renewal, active capital recycling, foreign exchange management.

[00:27:19]None of that is easy, but complexity isn't necessarily a weakness, not if it's managed well. The objective isn't to build the simplest hospitality REIT.

[00:27:29]The objective is to build one that's capable of adapting as the industry evolves. And I think that's what execution resilience really means. Not avoiding difficult decisions, but repeatedly making good ones.

[00:27:41]The Dividend Uncle's Take.

[00:27:43]Over the past week, I've spent a lot of time reading through Clause annual reports, investor presentations, acquisition announcements, and financial statements. Coming into this deep dive, I thought I already had a fairly good understanding of the trust. I've owned Clause for some time. I've followed its quarterly updates. I've understood the broad investment thesis. But somewhere during this research, I realized something. The way I had been thinking about Clause wasn't wrong. It was simply incomplete. Like many investors, I initially viewed Clause through the same lens as every other hospitality REIT. A recovery story. A beneficiary of stronger tourism. A trust that would do well when travel demand recovered and struggled when it weakened. That's how most of us instinctively think about hospitality. Hotels are cyclical.

[00:28:29]Therefore, hospitality REITs must also be cyclical. But after going through several years of management decisions instead of just one year's financial results, I realized something else was happening beneath the surface.

[00:28:41]Management wasn't trying to build a better hotel portfolio. They were trying to build a more resilient business. And after reviewing the three layers of resilience, I believe they have done a remarkable job and this is a REIT I'm willing to continue investing in as one of the few selected core REITs in my portfolio.

[00:28:59]That brings us to the end of this deep dive. If you stayed with me all the way through, thank you. I know this has been a longer research than usual, but I hope it has given you a different way of thinking about hospitality REITs and perhaps about long-term investing more broadly. I'd genuinely love to hear your thoughts in the comments. If you found this research useful, please consider giving it a like and subscribing to the channel. It genuinely helps support the time and research that goes into producing these deep dives. Until next time, happy investing.