Ascott Residence Trust 1Q20 - UOB Kay Hian 2020-05-05: Tiding Over With Domestic “Mid-Scale” Long Stays

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust 1Q20 - Tiding Over With Domestic “Mid-Scale” Long Stays

In a pandemic-stricken world, Ascott Residence Trust has seen weaker performances across all major markets, with properties exposed to transient guests most affected.
Ascott Residence Trust's balance sheet remains healthy, with ample liquidity to meet 2020 maturing debt (and low risk of equity fund-raising exercise from portfolio valuation declines). At least until international travel restrictions are lifted, management sees a market in the “mid-scale” long-stay segment for domestic guests.

At a teleconference call on 4 May 20, Ascott Residence Trust (SGX:HMN)'s management provided updates on its properties globally, financial position, sector outlook and operating strategies.

Ascott Residence Trust's 1Q20 portfolio REVPAU declined to S$103 (-23% y-o-y), largely due to significantly lower average portfolio occupancy (eg 60s%) but still above breakeven level (estimated at. 40%), while ADR remained relatively stable.
As of 30 Apr 20, a total of 18 properties from France (11), Japan (4), Belgium (1), Spain (1) and South Korea (1) were temporarily closed due to government mandate or to optimise resources.

Major markets, such as Australia (-28%), China (-31%), Japan (-37%), Singapore (-30%), UK (-15%), US (-22%), Vietnam (-20%) saw RevPAU declines in terms of local currencies.
According to management, they observed markets with higher transient exposure (eg Australia, Japan, Europe, New York properties) seeing more significant occupancy declines, while those with longer-stay exposure (eg China, Vietnam properties) were more resilient.

Valuation of properties needs to drop by at least 20%/30% before breaching the 45%/50% (new) MAS leverage limits. A devaluation of such magnitude is unlikely, given that most valuers take a longer-term view (and see such pandemics as anomalies).
During GFC, Ascott Residence Trust’s portfolio only declined by 6%. Current gearing (35.4%) also provides Ascott Residence Trust with S$1.25b debt headroom to 45% (and S$2.1b to 50% limit). Finally, given the S$250m perpetuities (4.68%) callable on 30 Jun 20 and less-than-favourable perps market conditions, management indicated they could likely reset the perps, or refinance with debt and result in a higher 39% gearing.
In terms of available liquidity, Ascott Residence Trust has c.S$900m (comprising S300m cash, S$163m divestment proceeds from Somerset Liang Court expected in 2H20, and S$425m credit facilities), which will be more than cover debts maturing in 2020 (S$404m).

US and Japan portfolio were affected by weaker leisure and transient segments, seeing a 22% and 37% y-o-y declines in RevPAU which may persist into 2Q20.
For Japan portfolio, rental housing occupancies remain strong ( > 90%), while portfolio’s other lessees and operators are under pressure. Hotel WBF, master lessee to three Ascott Residence Trust properties (1.8% Ascott Residence Trust portfolio valuation) has filed for civil rehabilitation, although rent (up to Apr 20) has been received, along with three months’ rent in security deposits.
Its US portfolio has seen impact beginning in Mar 20, but has tried to capture alternative businesses (eg healthcare workers, personnel managing the temporary hospital nearby).

Singapore portfolio saw income supported by fixed rents and alternative businesses (eg self-isolation, Malaysians affected by border shutdown).
Singapore RevPAU declined 30% y-o-y, as a result of travel restrictions on foreign visitors and gradual winding down of Somerset Liang Court (SLC). SLC and Park Hotel were block booked for government quarantine facilities. Ascott Residence Trust also benefits from government initiatives, including wage support credit and property tax rebates.

China properties are seeing a return of domestic demand, as movement restrictions ease. Management sees China occupancy at mid-50% in 1Q20 sustained, forming as a stable base. First-tier cities’ occupancies were also resilient, supported by long-staying guests. Management also sees recovery in international travel and corporate demand lagging that of domestic travel and leisure, as foreign visitors are still prohibited from entering China. More than 90% of hotels in China have also re-opened, according to STR.
As for Vietnam, occupancy was supported by long-stay corporate segment. Ascott Residence Trust’s properties are expected to be under pressure, from soft corporate demand, until international travel restrictions are lifted.

Management noted 2Q20 will remain challenging, although Ascott Residence Trust’s long-stay model (ie base business) and economy segment are expected to offer some resilience. Together, Ascott Residence Trust’s master leases (25%) and management contracts with min guaranteed income (13%) accounting for 38% of its 2019 GP will also provide some income stability.
Master leases which are due this year are all leased to Ascott Sponsor, and are unlikely to see any significant change in base rents.
Management also sees near-term demand driven domestically (even when measures are removed), and will re-focus their sales/marketing efforts accordingly. They are also seeking any alternative income sources (eg isolation, healthcare personnel, and workers affected by the shutdown/or looking for alternate work-from-home locations) to partially mitigate the loss of business.
Although Ascott Residence Trust is still operationally cash-flow positive, management is still reviewing its distribution payout pending more visibility from 1H20 results.

We reduce our existing 2020/21/22 DPU by 43%/5%/5%, factoring in steeper 2020 RevPAR declines of 43%/31% (vs 7%/8% previously) for properties with higher domestic/less-domestic oriented properties.
Our target price of S$1.16 (previously S$1.24) is based on DDM required rate of return: 7.5%, terminal growth: 1.0%).
See Ascott Residence Trust Share Price; Ascott Residence Trust Target Price; Ascott Residence Trust Analyst Reports; Ascott Residence Trust Dividend History; Ascott Residence Trust Announcements; Ascott Residence Trust Latest News.
Share price catalyst: Lifting of travel restrictions, and reduction in global infection rates.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-05

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