Ascott Residence Trust - Phillip Securities 2020-07-29: Slow, Precarious Recovery

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ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - Slow, Precarious Recovery

• Ascott Residence Trust (SGX:HMN)'s 1H20 DPU of 1.05 cents formed 19.6% of FY20e DPU, $5mn of dist. income retained.
• RevPAU down 52% y-o-y in 1H20 (1Q20: 23%); 1H20 Gross Profit -28% y-o-y with Master Leases (ML)/ Management Contracts with Minimum Guaranteed Income (MCMGI)/ Management Contracts (MC) contributing 59%/7%/34% respectively.
• Erosion of “stable” revenues as 4 French ML and 3 UK MCMGI leases to Sponsor were renewed on variable terms.
• Maintain BUY with lower Target Price of $1.08 (previously $1.25) as we lower revenue to reflect a slower recovery of international travel, the extension of 4 French ML and 3 UK MCMGI on variable terms, and the sale of AGZ and CDMP.
• FY20e DPU is lowered by 21.7% and represents a DPU yield of 6.0%.

The Positives

$843mn in cash and credit facilities sufficient to cover c.2 years of fixed cost

• $843mn in cash and credit facilities sufficient to cover c.2 years of fixed cost, comprising $620mn in cash & committed credit facilities, $163mn in cash proceeds from divestment of Somerset Liang Court received in July 2020 and $60mn uncommitted credit facility secured in July 2020.
• We note that Ascott Residence Trust’s interest coverage ratio deteriorated q-o-q from 5.1x to 3.6x, however the cash and credit facilities in place will help to weather this period of depressed earnings.

Alternative sources of revenue to help fill occupancy (1H20: c.50%, 1Q20: c.40%).

• International travel bans are still largely in place. However, Ascott Residence Trust has been able to tap into alternative sources of revenue such as government bookings as quarantine facilities (SG) and temporary facilities for healthcare workers and COVID responders (US). Figure2 in PDF report attached below summarises sources of alternative revenue. Ascott Residence Trust may benefit from the lifting of domestic travel restrictions in certain countries and the respective government initiatives to spur domestic travel.

The Negatives

1H20 RevPAR fell 52% y-o-y; 21 properties temporaily closed

• Ascott Residence Trust's 1H20 RevPAR fell 52% y-o-y; 21 properties temporaily closed, comprising 11 properties in France (ML), 6 in Japan (2 ML, 2 MC), and 1 each in Belgium (MGMGI), Spain (MCMGI) 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.
• RevPAR for all countries deteriorated further due to lower occupancies (1H20: 50% vs 1H19: 80%) and room rates, except for SG, which improved 5ppts from -30% to -25%, largely due to block bookings by the government.

Erosion of “stable” revenues as 4 French ML and 3 UK MCMGI leases were renewed on variable terms.

• Ascott Residence Trust extended 7 expiring leases with the sponsor, albeit on variable terms. 4 expired French master leases extended on variable rent terms for 1 year w.e.f. 25 March 2020 and 3 expired UK MCMGI converted to management contracts for 1 year w.e.f. 1 May 2020. In 1H20, Ascott Residence Trust received income top-up of GBP1.0mn for the MCMGIs in UK.

Outlook

• 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 make up 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 have been used to offset rent until July. WBF is Japanese owner-operator, with 15 properties on their books and managed 30 properties. Ascott Residence Trust is in discussions with WBF, Sponsor The Ascott Limited (TAL) and other operators, to take over operations, if necessary. TAL operates 8 SRs in Japan, 4 of which are under Ascott Residence Trust’s portfolio.
• Apart from the 3 WBF ML, 10 other assets are master leased to third party operators.

Unlocking value through divestments

• In July 2020, Ascott Residence Trust entered into two conditional agreements to divest Ascott Guangzhou (AGZ) and Citadines Didot Montparnasse Paris (CDMP) for c.S$191.4 million, at 52% and 69% above their respective book values. Ascott Residence Trust is expected to realise total estimated net gains of about S$23.2 million upon the completion of both transactions. The exit yields for AGZ and CDMP were 3% and 4% respectively. Including these transactions, Ascott Residence Trust will have

Maintain BUY with a lower target price of $1.08 (previously $1.25).

• We lower revenue to reflect a slower recovery of international travel, the extension of 4 French ML and 3 UK MCMGI on variable terms, and the sale of AGZ and CDMP. Our Ascott Residence Trust's FY20e DPU is lowered 21.7% and represents a DPU yield of 6.0%.
• 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.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-07-29

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.08 DOWN 1.250