Ascott Residence Trust - UOB Kay Hian 2020-11-02: 3Q20 Gradual Pick-up; Not Out Of The Pandemic Woods Yet


Ascott Residence Trust - 3Q20 Gradual Pick-up; Not Out Of The Pandemic Woods Yet

  • Ascott Residence Trust saw an overall recovery (RevPAU: +27% q-o-q) in its global portfolio, supported by domestic demand and government buyouts. China, Singapore and Vietnam properties were relatively resilient (ie smaller y-o-y RevPAU declines), while its Japan, UK and US properties were more affected by the loss of international demand.
  • Ascott Residence Trust’s diversified exposure and cash flow continue to position it well to tide through the storm.
  • Maintain HOLD with lower target price of S$0.91.
  • Entry price: S$0.83.

Ascott Residence Trust's 3Q20 Business Update.

  • During an analyst call on 30 Oct 20, Ascott Residence Trust (SGX:HMN)'s management said there was an overall pick-up across its global portfolio. Although the recovery had been uneven with international borders remaining largely closed, management opined that Ascott Residence Trust’s diversified presence and strong cash flow will tide the company through.

3Q20 portfolio revenue per available room (REVPAU) showed q-o-q recovery to S$47

  • Ascott Residence Trust's 3Q20 portfolio revenue per available room (REVPAU) showed q-o-q recovery to S$47 (+27%) but was still down 70% y-o-y. Average portfolio occupancy of 40% was higher q-o-q (2Q20: 30%) driven by domestic demand (China) and government buyouts (China, Vietnam, Malaysia and the Philippines), although corporate demand was confined to essential travel (eg project works).
  • Properties traditionally dependent on transient travellers and international demand were more affected, while those anchored by longer stays continued to see resilience. With master lessees, some rent abatement (1-2 months) may be granted for qualifying properties. Net of abatements, rental collection remained healthy (80%).

More reopenings in 3Q20 (93% operational) as conditions stabilised.

  • Only 6 of Ascott Residence Trust's properties remained closed (vs 21 temporary closures in 1H20) to conserve operating cash flow and consolidate demand among properties in similar locations.

Healthy balance sheet with 34.6% gearing (-1.5ppt qoq), sufficient liquidity and S$2.2b debt headroom.

  • Ascott Residence Trust has refinanced its debt due in 2020 (S$330m), extended its debt maturity profile (debt-to-maturity of three years) and obtained covenant waivers from supportive local lenders. Its strong cash flow includes S$1b of available funding, comprising S$305m cash, S$550m of credit facilities and S$180m net divestment proceeds (from ongoing divestments of Ascott Guangzhou, Citadines Didot Montparnasse Paris, Citadines Xinghai Suzhou, and Citadines Zhuankou Wuhan).

China properties (8% total assets) led the portfolio in recovery

  • China properties (8% total assets) led the portfolio in recovery, recording the smallest RevPAU y-o-y decline of 30% to Rmb321. China RevPAU improved q-o-q and saw above-market occupancy of 60% in 3Q20 on the back of long stays and healthy domestic demand.
  • Domestic air travel in China has returned to pre-COVID levels in Jan 20. Tier-1 cities saw stronger performances while Tier-2 cities were starting to see corporate travelling. With the COVID-19 situation under control, recovery momentum is expected to continue. However, average daily rate (ADR) growth is expected to be limited in the near term due to market competition in the mid-range segment.

Singapore and Vietnam properties were relatively resilient

  • Singapore and Vietnam properties were relatively resilient, seeing RevPAU declines of only 50% y-o-y and 58% y-o-y respectively. Ascott Residence Trust’s only managed-contract hotel in Singapore (Citadines Mount Sophia) has been contracted to the government until likely end-20, which has boosted its occupancy albeit at lower rates.
  • In Vietnam, occupancies were cushioned by corporate long-stays. Although a lockdown was imposed in Danang in Jul-Sep 20, travel has since resumed, according to management.

Japan, UK and US properties were most challenged

  • Japan, UK and US properties were most challenged, seeing the largest RevPAU declines of 91%, 89% and 78% y-o-y respectively.
  • Japan properties (under managed contracts) are located in Tokyo (Shinjuku) and Kyoto, hence are dependent on international tourists and had not benefitted as much from domestic travel. This is because as locals prefer visiting regional cities in Japan. Management sees some traction from Japan’s “Go To” domestic tourism campaign, with demand for day-use at Ascott Residence Trust’s properties and as bookings for next year’s Olympics in 1H21 driving near-term demand.
  • Ascott Residence Trust’s UK properties are all in London, hence are more affected by the absence of international travel demand.
  • As for US properties, although Element New York Times Square West was temporarily closed in late-Aug 20, this was partially mitigated by block bookings at Hotel Central Times Square from Jun 20. Encouragingly, management is seeing US bookings from leisure and drive-to markets with spikes on weekends, although it is still not sufficient to cover the absence of international and corporate demand.

Renewal of France master leases in 2020-21.

  • Accordingly, Ascott Residence Trust has 14% (6 leases, S$15m rent) and 12% (10 leases, S$13m rent) of its master leases expiring in 2020 and 2021 respectively. Pending negotiations, management is aiming for a fixed-variable structure.

Outlook: Encouraging pick-up although near-term headwinds remain.

  • Barring a virus resurgence, management expects a gradual pick-up in occupancies but limited ADR growth, led by domestic segments. Ascott Residence Trust’s properties anchored with long stays and in large domestic markets (China, France, Japan and the US) are expected to lead the recovery, while markets in lockdown and traditionally reliant on transient business may still see softness in 4Q20.
  • Management also expects property valuations to decline 5-10% (15% in certain instances) depending on their locations, although it sees Asia Pacific properties relatively less impacted. Depending on the market outlook and divestment gains unlocked, distribution payout will also be reviewed holistically.

Ascott Residence Trust's Earnings trimmed for 2020-22.

Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.91 DOWN 0.980