ASCOTT RESIDENCE TRUST (SGX:A68U)
Ascott Residence Trust - Solid Portfolio With Catalyst Ahead
- Income stability through geographic diversification and lease structure.
- Riding on Sponsor’s brand name and rapid growth. Inorganic growth potential - S$880mn debt headroom and ROFR pipeline of 20 properties.
- DPU accretive merger with Ascendas Hospitality Trust (SGX:Q1P).
- Maintain ACCUMULATE with a higher target price of S$1.42 (prev S1.36). FY19/FY20 distributable income increased by 2.9%/2.2% mainly due to cost savings from refinanced perps.
Ascott Residence Trust Background
- ASCOTT RESIDENCE TRUST (SGX:A68U) is an owner-operator of serviced residences (SRs) with 74 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, are operated under three core brands – Ascott, Citadines, Somerset.
- The Ascott Limited, Ascott Residence Trust’s sponsor, is a wholly-owned subsidiary and the hospitality arm of Mainboard-listed CAPITALAND LIMITED (SGX:C31) (market cap S$15.3bn).
Ascott Residence Trust Investment Merits & Outlook
- Income stability and through geographic diversification and lease structure. 49% of gross profit is stable, derived from master leases and management contracts with minimum guaranteed income. The remaining 61% is derived from management contracts, 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. The number of keys under management by Sponsor The Ascott Limited has been growing at a CAGR of 36.5%. YTD, The Ascott Limited has secured 10,600 units under management contracts and franchise models - double the number of units signed in 2018 – and will open 20 properties with over 2,846 rooms in 2019. This brings The Ascott Limited’s keys under management to 112,000, putting them on track to hit their 160,000 keys target by 2023.
- 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 shift 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. 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 a higher target price of S$1.42, factoring in the cost savings from the calling and reissuance of perps at a lower coupon. With interest rates expected to be depressed in the near term, the S$250mn 4.68% perps callable in June 2020 will likely be called and refinanced.
- Our target price does not include the effects of the Ascott Residence Trust-Ascendas Hospitality Trust combination, which is pending unitholder approval at the EGM on 21 October 2019.
Natalie Ong
Phillip Securities Research
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https://www.stocksbnb.com/
2019-10-11
SGX Stock
Analyst Report
1.42
UP
1.360
