Ascott Residence Trust - UOB Kay Hian 2021-07-28: 1H21 Gradual Recovery Though Headwinds May Linger

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - 1H21 Gradual Recovery Though Headwinds May Linger

Ascott Residence Trust’s 1H21 DPU was in line with expectations. Revenue was up 15% h-o-h, while RevPAU continued to show a sequential improvement (+18% q-o-q) though occupancy remains fairly steady. Domestic leisure travel and recovering corporate travel are bright spots. However, certain geographies such as Australia could face near-term weakness from COVID-19 measures.
Maintain HOLD rating on Ascott Residence Trust with an unchanged target price of S$1.09.

Ascott Residence Trust (SGX:HMN) posted 1H21 DPU of 2.05 cents, up 95% y-o-y from the low base seen in 1H20. This represents 50% of our full-year forecasts, in line with expectations.
The distributable income for 1H21 included a one-off partial distribution of divestment gains of S$20m, replacing income loss from divested assets, as well as termination fee income and exchange gains.
Ascott Residence Trust has S$360m in net gains unlocked from divestments from 2019-21, which may be utilised in distributable income top-up in 2H21 as well.

Slightly more than half of the decrease in revenue was due to the absence of divested assets (Somerset Liang Court, Ascott Guangzhou, Somerset Azabu East, Citadines City Centre Grenoble and Citadines Didot Montparnasse and Somerset Xu Hui Shanghai). Existing portfolio was down y-o-y due to the effects of COVID-19, while new acquisitions such as rental housing properties in Japan and student accommodation assets in the US accounted for a slight S$3.6m increment.

Ascott Residence Trust's RevPAU growth was aided by the easing of restrictions. China led the recovery with higher corporate demand while Europe benefitted from leisure demand in the summer season. However, average portfolio occupancy improved only marginally to mid-50% in 2Q21 compared with 50% in 1Q21.
Following a winding up application by Park Hotel Management, Park Hotel Clarke Quay in Singapore is being repossessed by Ascott Residence Trust which is currently assessing options for the operations of the property. A provision of S$5.3m has been made in 1H21 for the ing rents and the master lease which is expiring in 2023, and will subsequently be terminated.

Geographically, Ascott Residence Trust saw an increase of 18% q-o-q (local currency terms) in Australia RevPAU due to higher domestic leisure demand and block bookings in 2Q21, though the country has been affected by rising COVID-19 cases since.
China’s RevPAU was up 18% q-o-q with an uptick in demand for corporate long stays and leisure travel during the summer school holidays in 3Q21.
Japan’s RevPAU increased 28% q-o-q due to higher domestic leisure demand during the holiday seasons, and month-long corporate bookings, though a state of emergency is still in place until Aug 21.
Singapore’s RevPAU was stable q-o-q and will continue to see bookings from government contracts until 3Q21.
UK’s RevPAU was up 214% q-o-q from a low base due to its lockdown, while the US’ RevPAU was steady.

Ascott Residence Trust’s medium-term target is to increase asset allocation in rental housing and student accommodation properties from 9% currently, to 15-20% of portfolio value, which would continue to see a considerable investment in such assets which have seen resiliency from the effects of COVID-19. Its maiden student accommodation asset: Paloma West in Atlanta USA is 97% pre-leased for Fall 21, while achieving > 95% average occupancy since its acquisition in Feb 21.
The US student accommodation market has been on the recovery given wider distribution of vaccines and a reopening of universities to international and domestic students. Ascott Residence Trust also has 50% stake in the joint development of a student accommodation asset in South Carolina, USA which largely caters to domestic students in the University of South Carolina. Investment amount is S$73m with a completion date set for 2Q23. While contribution from the asset is only set to take place in the medium term, target stabilised EBITDA yield is attractive at 6.2% and it offers a potential development upside.

Gearing at 35.9% (-0.2ppt q-o-q) was relatively stable, and Ascott Residence Trust has a S$1.9b debt headroom. Liquidity reserves remain intact with S$1.2b of available funding. Ascott Residence Trust is well placed to continue its capital recycling strategy.

The initial phase of recovery is largely driven by domestic and essential corporate travel segments. Management noted that 2Q21 has seen an encouraging increase in forward bookings from corporates although they are still below pre-COVID19 levels.
As for international travel, demand may return in a more gradual manner and would depend on vaccination rollout in various geographies.

Positive newsflow on hotel room rates, hotel room occupancy rates and tourist arrivals.

Lucas Teng UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2021-07-28

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