Ascott Residence Trust - OCBC Investment 2020-07-29: Weak 1H But Recovery Ahead

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - Weak 1H But Recovery Ahead

Ascott Residence Trust (SGX:HMN)'s results came in below our forecast and market consensus due to weaker-than-expected performances across its portfolio. 1H20 revenue fell 16% y-o-y to S$208.5m while gross profit declined 28% y-o-y to S$88.6m, mainly due to lower contributions across its portfolio and divestment of Ascott Raffles Place Singapore and Somerset West Lake Hanoi, partially offset by additional contribution from Ascendas Hospitality Trust post-merger and the acquisition of Quest Macquarie Park Sydney and Citadines Connect Sydney Airport.
Ascott Residence Trust retained S$5m or 15% of income available for distribution on potential rental deferment or waivers to support tenants. The impact on DPU, however, was offset by a S$5m top-up from capital distribution. As such, Ascott Residence Trust's 1H20 DPU decreased 69% y-o-y from 3.43 S cents in 1H19 to 1.05 S cents.

Ascott Residence Trust's 1H20 portfolio RevPAU fell 52% y-o-y to S$70, mainly attributable to lower occupancies (~50%) due to travel restrictions and country lockdowns amid Covid-19. Ascott Residence Trust’s key markets such as Japan, Singapore, Australia, US and China’s performances saw 25%-68% declines in RevPAU.
For Singapore (17% of total assets), RevPAU fell 25% y-o-y to S$147. Occupancies continued to be supported by bulk bookings from government for self-isolation, healthcare personnel and workers affected by border shutdown. Management noted that the contracts from government is likely to last through 3Q, which will continue to provide some buffer to revenue loss. With the S$45m marketing campaign from Singapore Tourism Board to revive domestic tourism, Ascott Residence Trust hopes to seize opportunities from staycations.
As for Japan (20% of total assets), RevPAU fell 68% y-o-y.
The outlook remains challenging despite resilient contribution from 11 rental housing properties (occupancies remained high at > 90%). Recall that WBF, master lessee to three Ascott Residence Trust properties (1.8% of valuation), filed for bankruptcy in 1Q. Ascott Residence Trust has 3 months’ rent in security deposits held in escrow which have been used to offset the rent up to July 2020. Ascott Residence Trust is in discussions with WBF and other operators to assess the best course of action.

4 expired French master leases and 3 expired UK management contracts with minimum guaranteed income have been extended on variable rent terms for 1 year.
As at 30 June 2020, Ascott Residence Trust’s gearing stood at 36.1% with debt headroom of S$2.0b, assuming a gearing limit of 50%. It has S$843m of available funding which is sufficient to cover ~2 years of fixed cost.
As more countries exit from lockdowns, and with the implementation of “travel bubbles” and government supports on domestic tourism, Ascott Residence Trust could see recovery in 2H20, baring the risk of second wave of infections.
We adjust our cost of equity assumption down to account for this, but as we also lower our DPU forecasts for FY20/21 by 44%/28%, our fair value estimate decreases slightly from S$1.06 to S$1.03.
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OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-07-29

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