Ascott Residence Trust - Phillip Securities 2020-05-08: Doing Well, All Things Considered


Ascott Residence Trust - Doing Well, All Things Considered

  • Ascott Residence Trust (SGX:HMN)'s RevPAU down 23% y-o-y in 1Q20 and 18 properties temporarily closed.
  • Self-isolation clients and COVID responders shored up occupancy in SG and US to 80%.
  • Maintain BUY with lower Target Price of $1.17 (previously $1.53). We lowered our FY20e gross profit (NPI) forecast by 13.9%, reducing our RevPAU estimates by 20% to 30% for the full year. FY20e DPU has been cut by 15.4% to 6.87cents, representing a yield of 8.0%.
  • The change in our target price is largely due to the higher cost of equity assumptions incorporated in our valuation, raised from 7.2% to 8.5%.

The Positives

Balanced lease structure mitigates the impact of COVID-19 outbreak.

  • Ascott Residence Trust targets a 50:50 split between stable and growth (variable) revenue. Stable revenue is generated by leases that stipulate a minimum rent that Ascott Residence Trust can expect to receive (master leases (ML) and management contracts with minimum guaranteed income (MCMGI)), while the growth revenue is from assets on management contracts, where Ascott Residence Trust’s revenue is based on the occupancy and room rates charged.
  • The Sponsor, The Ascott Limited (TAL), is the master lessee of Ascott-branded Serviced Residences that are on ML and we do not foresee any default risk related with The Ascott Limited. However, the master lessee of in 3 of the ML assets in Japan, WBF Hotels & Resorts, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April (elaborated below). Apart from the 3 WBF ML, 5 other assets are master leased to third party operators.

Occupancies at MC assets above breakeven occupancy (c.40%).

  • Ascott Residence Trust enjoys a relatively high steady-state occupancy level due to the long-staying clientele that their portfolio of 59 Serviced Residences, 11 rental housing and 18 hotels/business hotels. We understand from the management that baseline occupancy from long-stay clients are in the 40% to 50% region.
  • Figure 1 in attached PDF report outlines Ascott Residence Trust’s performance in the key markets that Ascott Residence Trust operates in and Figure 2 in attached PDF report shows the average length of stay by country.

Pursuing alternative sources of revenue to shore up occupancy.

  • While most of the countries Ascott Residence Trust operates in have enacted lockdowns and bans on international travel, alternative sources of revenue have emerged. In Singapore, occupancies fell to c.60% in March, however, block booking of Park Hotel and Somerset Liang Court by the government as quarantine facilities, Malaysians affected by the border closure and those choosing to self-isolate in hotels/ serviced residences have helped to bump occupancy up to c.80%.
  • Similarly, DoubleTree by Hilton New York and Sheraton Tribecca New York’s occupancies were lifted by healthcare workers and COVID-19 responders – occupancy at these properties were c.80%.

The Negatives

18 properties temporarily closed as at 30 April 2020

  • 18 properties temporarily closed as at 30 April 2020, comprising 11 properties in France (ML), 4 in Japan (2 ML, 2 MC), and 1 each in Belgium (ML), Spain (ML) and South Korea (ML). Some of the properties were mandated to close by the government and others were close due to soft demand (Paris) or to optimise resources.


  • WBF Hotels & Resorts (WBF), the master lessee in 3 Japan properties, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April 2020. These 3 properties are located in Osaka (of which 2 are closed) and makeup c.1.8% of Ascott Residence Trust’s valuation. They would have contributed S$6.7mn in rent on a full-year basis. WBF has paid rent up till April 2020 and 3 months’ worth of security deposits are held in escrow. WBF is Japanese owner-operator, with 15 properties on their books and managed 30 properties. Ascott Residence Trust is in discussions with The Ascott Limited, amongst other operators, to take over operations, if necessary. The Ascott Limited operates 8 serviced residences in Japan, 4 of which are under Ascott Residence Trust’s portfolio.

Perps –

  • S$250mn 3.86% perps are callable in June 2020. Several options are available to Ascott Residence Trust, all of which should result in cost savings. Ascott Residence Trust can let the coupon reset (next rate will be c.3.4%, with an option to call the perps every 6 months), call the preps and reissue new perps, refinance the perps with debts (gearing will move to c.39%). In this current climate, we think Ascott Residence Trust will likely let the coupon reset at a lower rate. For reference, Ascott Residence Trust refinanced S$150mn 5% of perps with S$150mn 3.88% perps in September 2019, capturing c.S$1.7mn in savings.

Deferrals –

  • Some operators have asked for rental deferments. Deferred rent will be paid in instalments over the next two quarters.

Revaluation risk –

  • Drawing on the GFC for reference, valuation fell by c.6%.

Lease renewals (of MLs) –

  • All of the master leases due for renewal are with the Sponsor, hence renewal risk is low.

Bank Covenants –

  • Sufficient buffer of 30% to 50%o on LTV covenants. Ascott Residence Trust has negotiated with their lenders to have the ICR testing covenant waived temporarily.

Maintain BUY with a lower target price of $1.17 (previously $1.53).

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-05-08
SGX Stock Analyst Report BUY MAINTAIN BUY 1.17 DOWN 1.530