Ascott Residence Trust - UOB Kay Hian 2021-11-02: 3Q21 Steady Recovery Powered By Domestic Leisure Demand

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ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - 3Q21 Steady Recovery Powered By Domestic Leisure Demand

• Ascott Residence Trust (SGX:HMN)'s Portfolio RevPAU rebounded 8% q-o-q to S$70 in 3Q21, powered by domestic leisure demand during the summer season and weekends, particularly in Europe, the UK and the US. Ascott Residence Trust plans to increase asset allocation to student accommodation and rental housing to 15-20% of portfolio value and has announced the acquisition of Seven07 at Champaign, Illinois for US$82.3m.
• Ascott Residence Trust’s distribution yield is expected to improve from 3.7% in 2021 to 5.2% for 2022. Maintain BUY. Target price: S$1.20.

Ascott Residence Trust (SGX:HMN) provided a positive 3Q21 business update:

• Recovery momentum driven by domestic demand. Portfolio RevPAU rebounded 8% q-o-q to S$70 in 3Q21 in a fifth consecutive quarter of sequential recovery, driven by higher average daily rates. The recovery was powered by domestic leisure demand during the summer season and weekends, particularly in Europe, UK and the US. Japan also benefitted from group bookings during the Olympics Games.
• UK: welcoming tourist and business travellers back to London. RevPAU recovered 45% q-o-q to £64 in 3Q21. The recovery was driven by domestic leisure demand during the summer holiday season, especially during weekends. The UK has lifted all COVID-19 restrictions since 1 Jul 21. International inbound travel is currently dominated by European travellers. Ascott Residence Trust’s four properties in London will benefit from a broad-based return of international visitors with all borders to be opened from 1 Nov 21.
• US: anticipating recovery in domestic corporate demand. RevPAU increased 50% q-o-q and 85% y-o-y to US$87 in 3Q21. Element New York Times Square West and Sheraton Tribeca New York benefitted from strong domestic leisure demand, especially during weekends. Hotel Central Times Square is undergoing refurbishment and will be rebranded as voco Times Square South when launched in 4Q21. voco has premium positioning within the IHG stable of brands and the property is expected to enjoy an uplift in room rates post-renovation. Management sees a steady increase in corporate bookings as the working population returns to work at their office premises.
• Japan: domestic travel stimulated by Go To Travel campaign. RevPAU doubled q-o-q to ¥5,278 in 3Q21 with uplift from the Olympic Games as Ascott Residence Trust has two properties in Tokyo under contracts for group bookings. Its Kyoto property benefitted from healthy domestic leisure demand. The state of emergency has been fully lifted in Sep 21. Plans are underway to restart the Go To Travel campaign by end-21.
• Resiliency from long-stay assets. Ascott Residence Trust’s long-stay portfolio performed well in 3Q21 with rental housing in Japan achieving high occupancy of > 95% and maiden student accommodation property Paloma West Midtown at Georgia institution of Technology was fully occupied. Three new rental housing properties acquired in Jun 21 have started to contribute in 3Q21.

Expanded scope of investment mandate.

• Ascott Residence Trust has expanded its principal investment strategy to encompass income-producing properties used as serviced residences, rental housing, student accommodation and other hospitality assets. The expansion to student accommodation came into effect on 27 Feb 21.
• Enhancing diversification and resiliency by building scale in long-stay assets. Ascott Residence Trust has acquired three student accommodation properties in the US (Georgia Institute of Technology, University of South Carolina and Texas Tech University) and three rental housing properties in Japan (Sapporo) in 9M21. The allocation to these long-stay assets increased by 6ppt year-to-date to 11% of portfolio value. Ascott Residence Trust plans to increase allocation to 15-20% in the medium term. Student accommodation provides higher gross margin compared with 50% for other hospitality assets.
• Acquisition of 4th PBSA property in the US. Ascott Residence Trust has announced the acquisition of freehold 548-bed student accommodation property named Seven07 at Champaign, Illinois for US$82.3m. The property is within 200m from University of Illinois Urbana-Champaign and is located close to restaurants, cafes and lifestyle amenities. The property is 100% occupied in academic year 2021. It provides EBITDA yield of 4.5%. EBITDA yield is expected to improve to 4.8% due to rental growth of 8% for academic year 2022 (Sep 22 to Aug 23). The acquisition is accretive to pro forma 2020 DPU by 1.2%. based on funding mix of debt 45% and equity 55%.
• Soft opening for lyf one-north in 4Q21. lyf one-north, Ascott Residence Trust’s maiden development project and co-living property with 324 units, is scheduled for soft opening in 4Q21. The property is located at research and innovation hub, one-north, and is within a 2-minute walk from one-north MRT station. lyf one-north caters to technopreneurs and professionals from research and knowledge-based companies and start-ups. There are 400 companies and 800 start-ups located in the vicinity. Management previously estimated that yield-on-cost for this development is at 6%.

Ascott Residence Trust - Earnings Revision

• We raised our 2022 and 2023 DPU forecast by 8% and 10% respectively due to:
  1. faster and stronger recovery from Japan and the US, and
  2. contribution from newly acquired Seven07 serving students at University of Illinois Urbana-Champaign.
• Maintain BUY. Our target price of S$1.20 is based on DDM (cost of equity: 6.5%, terminal growth: 1.8%). Ascott Residence Trust trades at P/NAV of 0.89x, which is a discount compared to peer CDL Hospitality Trusts (SGX:J85) at 0.93x.
• See
  • Ascott Residence Trust's Share Price,
  • Ascott Residence Trust's Target Price,
  • Ascott Residence Trust's Analyst Reports,
  • Ascott Residence Trust's Dividend History,
  • Ascott Residence Trust's Announcements,
  • Ascott Residence Trust's Latest News.
• Catalysts:
  1. Yield accretive acquisitions for student accommodation and rental housing properties.
  2. Contribution from lyf one-north, its maiden development project, which is scheduled to soft open in 4Q21.
  3. Recovery of the hospitality industry in Europe, Americas, Japan and Singapore, followed by s in the Asia Pacific region.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-11-02

SGX Stock Analyst Report BUY MAINTAIN BUY 1.20 UP 1.160