ASCOTT RESIDENCE TRUST (SGX:A68U)
Ascott Residence Trust - Solid Portfolio With Catalyst Ahead
- Income stability through geographic diversification and lease structure.
- Beneficiary of Riding on Sponsor’s brand name and rapid growth. Inorganic growth potential - S$880mn debt headroom, ROFR pipeline of 20 properties.
- DPU accretive proposed combination with Ascendas Hospitality Trust (AHT).
- ACCUMULATE with a target price of S$1.36.
Company Background
- ASCOTT RESIDENCE TRUST (SGX:A68U) is an owner-operator of serviced residences (SRs) with 79 properties totalling 11,426 keys spanning 14 countries. c.85% of gross profit is derived from its eight key markets – namely, the US, Japan, UK, France, Vietnam, Singapore, China and Australia.
- Ascott Residence Trust’s SRs, excluding its US properties, are operated under three core brands – Ascott, Citadines and Somerset.
- Ascott Limited, Ascott Residence Trust’s sponsor, is a wholly owned subsidiary and the hospitality arm of Mainboard-listed CapitaLand Limited (market cap S$15.3bn).
Investment Merits/Outlook
Income stability and through geographic diversification and lease structure.
- 41% of gross profit is stable, derived from master leases (ML) and management contracts with minimum guaranteed income (MCMGI) while the remaining 59% is derived from management contracts (MC), thus providing upside potential.
- Geographic diversification across 14 countries reduces the impact of country-specific factors affecting corporate and leisure travel.
Riding on Sponsor’s brand name and growth trajectory.
- Accommodation operators have been aggressively growing scale by increasing the number of keys under management. The number of keys under management by Sponsor, Ascott Limited, has been growing at a CAGR of 36.5%. Ascott Limited currently has c.102,000 keys under management across 32 countries and plans to operate 160,000 keys by 2023.
- Ascott Residence Trust will benefit from the increased brand awareness as the 79 SRs and business hotels are operated under the three Ascott brands – Ascott, Citadines and Somerset.
Inorganic growth potential - S$880 debt headroom, ROFR pipeline of 20 properties.
- Ascott Residence Trust has the ability to grow inorganically owing to their right-of-first-refusal (ROFR) pipeline of 20 properties and a sizable debt headroom of c.S$880mn, which can potentially lift DPU by 10.9%
Growth in popularity of Serviced Residences and select-service accommodation.
- The rise of select-service can be attributed in part to the cultural shift of preference for value and indifference towards certain services offered at full-service hotels. Lower running costs (Opex and Capex) of select-service accommodations means higher profit margins for operators. Select-service hotels account for c.63% hotel development pipeline in the US according to STR, a sharp increase from an average of 25% in the early 2000s.
DPU accretive proposed combination with Ascendas Hospitality Trust (AHT).
- Ascott Residence Trust unitholders can expect DPU accretion of c.2.5% from the combination, along with other positive externalities such as possible inclusion to the FTSE NAREIT index.
Recommendation
- Maintain ACCUMULATE with an unchanged target price of S$1.36. Our target price does not include the effects of the Ascott Residence Trust-Ascendas Hospitality Trust (SGX:Q1P) combination, which is pending unitholder approval.
Natalie Ong
Phillip Securities Research
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https://www.stocksbnb.com/
2019-07-12
SGX Stock
Analyst Report
1.360
SAME
1.360
