Ascott Residence Trust - DBS Research 2020-01-31: Tools To Brave The Virus Storm

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - Tools To Brave The Virus Storm

Diversity remains a key defense against volatility in the hospitality sector.
Ample capacity to acquire and grow its earnings base and earnings in 2020; pricing in S$350m of acquisitions in our estimates.
FTSE EPRA NAREIT Developed Index inclusion a near term catalyst.
BUY; Target Price raised.

We maintain our BUY call on ASCOTT RESIDENCE TRUST (SGX:HMN) with a higher target price. See Ascott Residence Trust Target Price.
Post consolidation with Ascendas Hospitality Trust, we see greater financial flexibility and capacity to take on accretive acquisitions. With a S$1.5bn headroom, we believe that Ascott Residence Trust has significant firepower to take on accretive deals to grow its portfolio and distributions. In addition to taking into our estimates for the combined entity, we have assumed acquisitions of S$350m @ 5.5% yield in our estimates.

Ascott Residence Trust's 4Q19 revenue of S$134.1m represented a 2% dip y-o-y, bringing FY19 revenue to S$514.9m (flat y-o-y).
On a full year basis, the lower revenue from Ascott Raffles Place and Somerset West Lake Hanoi was neutralised by higher revenue from existing properties and maiden contributions from Citadines Connect Sydney Airport, which was acquired in May 2019.
Net property income (NPI) rose 3.0% y-o-y to S$65.3m in 4Q19, with full year registering a stronger growth of 6.0% y-o-y to S$252.6m. The higher NPI was attributable to the Philippines, Belgium and Singapore, which increased by 42%, 38% and 20% respectively on higher demand.
Both DPU for 4Q19 and FY19 rose 6.0% to 2.27 Scts and 7.61 Scts. Full year revenue and DPU made up 95% and 104% of our estimates at S$541m and 7.29 Scts respectively. See Ascott Residence Trust Dividend History.

Post-merger, Ascott Residence Trust’s portfolio will be well diversified in APAC (68% portfolio value) and Europe/America (32%), with a mere 7.2% exposure in China.
In 4Q19, while 38% of NPI was derived from master leases which offers greater stability and income visibility, this is expected to increase as a large proportion of Ascendas Hospitality Trust’s revenues are master leases. The remaining c.62% of management contracts is well diversified across nine countries, with China representing just 6%.
In addition, the more than timely divestments of Citadines Xinghai Suzhou and Citadines Zhuankou Wuhan, will further reduce China exposure.
Occupancy within Ascott Residence Trust’s China hotels is expected to remain stable at 60-70%, with average length of stay of 6 months.
Exposure to Chinese tourists is less than 10% on a global basis, limiting downside risks associated to stricter travel restrictions among Chinese travellers.
We believe that service residences will stand a better advantage than hotels due to the lower room turnover and long-term nature of stays. Length of stays in Singapore average 2 months while that in Japan average at 2.5 months.

Ascott Residence Trust's gearing ratio remained at a healthy level of 33.6%, with a debt headroom of c.S$1.5bn on a target gearing ratio of 45%.
Effective borrowing cost inched down 10 bps to 2.1% for the quarter.
We think that borrowing cost may go down further with the potential refinancing of perpetual securities with a higher interest of 4.68%.
With the last round of perpetual securities raised at a rate of 3.88% last year, we believe Ascott Residence Trust will be able to refinance at a lower rate.

With an enlarged debt headroom following the merger with Ascendas Hospitality Trust of S$1.5bn, we think another acquisition might be just around the corner.
We have modelled in S$350m of acquisitions at a 5.5% NPI yield, fully debt funded, to be executed mid-2020. Markets of interest include Europe, Singapore, Japan, Vietnam, and Australia.
Capital distribution reserve was supplemented by divestment gains over FY18 – FY19. Out of the S$190m divestment gains recognised over the period, only 16% has been distributed, with S$160m available for distributons or acquisitions.

We understand that Ascott Residence Trust, post consolidation, has met all the criteria for indexation into FTSE EPRA NAREIT Developed Index, and we believe the stock will be a candidate during the upcoming index review.

We like Ascott Residence Trust’s consistent asset reconstitution strategy, divesting assets that have achieved an optimal level of capital value growth and deploying them into other properties with higher returns and growth runway. On that front, Ascott Residence Trust has divested and recorded gains of c.S$110m through sale of a partial stake in Somerset Liang Court, West Lake Hanoi and two Citadines properties in China.
With a gearing of c.34%, below its typical gearing level of 38%-39%, there is ample room to grow inorganically and hence, we have assumed S$350m of acquisitions in our estimates by middle of 2020.
See Ascott Trust Share Price; Ascott Trust Analyst Reports; Ascott Trust Announcements; Ascott Trust Latest News.

Derek TAN DBS Group Research | https://www.dbsvickers.com/ 2020-01-31

SGX Stock Analyst Report BUY MAINTAIN BUY 1.50 UP 1.45