Ascott Residence Trust - CGS-CIMB Research 2021-03-25: First In Line To See A RevPAU Recovery

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - First In Line To See A RevPAU Recovery

Ascott Residence Trust should see a faster-than-peer RevPAU recovery given its exposure to domestic demand.
Strong balance sheet to tide through pandemic, support inorganic growth and income top-up.
Positive development of COVID-19 vaccines points to a faster recovery.
Upgrade Ascott Residence Trust from Hold to ADD at a target price of S$1.20, implying 1.07x P/BV.

Ascott Residence Trust (SGX:HMN)’s revenue per average unit (RevPAU) continued to decline y-o-y in 2H20, by 69% to S$49, bringing full-year RevPAU to S$59 (-61%). However, on a q-o-q basis, RevPAU improved as occupancy rose from 40% in 3Q20 to mid-40% in 4Q20.
Ascott Residence Trust's performance in countries with long-stay guests, such as China and Vietnam, was better than in those that traditionally depend on transient travelers.
Despite weak 2H20 RevPAU, Ascott Residence Trust’s portfolio continued to generate operating profits and positive cashflow with gross losses only in Malaysia (-0.1% y-o-y in 2H20), the Philippines (-0.6%) and the US (-5.9%).

Ascott Residence Trust’s balance sheet remains robust, with net gearing of 36% (S$1.9bn debt headroom) and S$1.05bn in liquidity reserves as at end-FY20. It released S$5m of income available for distribution retained in 1H20 and top-up S$45m income for FY20.
Master lease and management contracts with minimum guaranteed income formed 67% of 2H20 gross profit. Under an unlikely zero-income scenario, Ascott Residence Trust has enough liquidity to cover its fixed cost for ~3 years. There will be no master lease expiry in 2021.
Supported by its strong balance sheet, Ascott Residence Trust made its first foray into purpose-built student accommodation (PBSA) in Atlanta, the US, for S$126.3m at ~5% yield despite the pandemic in Feb 21. Given its long 1-year WALE and high occupancy of ~95% despite COVID-19, the property will enhance Ascott Residence Trust’s income stability and realise a 4.4% DPU accretion, based on FY20 proforma.
We estimate Japan rental housing and US PBSA will account for 7% of its total assets post acquisition, and Ascott Residence Trust hopes to bring the proportion to 10-15%.

We believe Ascott Residence Trust would see a faster RevPAU recovery vs its peers as 41% of its asset under management (AUM) are in Singapore, Australia, Vietnam and China, countries with low rate of infection which supports a pick-up in domestic travel. It also has large exposure to
1. Europe (~20% AUM) which we expect to recover faster due to the strong domestic market and fast inoculation rate, and
2. Australia which has low infection rate and a relatively high proportion of tourists from countries which could vaccinate their population in 1.5 years – 30% of total arrivals in 2019.
We reduce our Ascott Residence Trust's FY21/22F DPU forecast but raise FY23F DPU forecast to factor in slower recovery in 2021F but an acceleration from end- 2022F. See report below for summary of key changes. We also assume a higher income distribution for FY21/22F and raise our terminal growth assumption.
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Key upside/downside risk: faster/slower recovery from COVID-19.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-25

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