Ascott Residence Trust - Phillip Securities 2022-02-10: Recovery & Rebalancing

ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust - Recovery & Rebalancing

Ascott Residence Trust (SGX:HMN)'s FY21 DPU of S$0.0432 (+17%) was in line, forming 99% of our forecast, supported by new acquisitions and recovery of existing portfolio.
Ascott Residence Trust's AUM in extended-stay segment increased from 5% to 16% following S$785mil in acquisitions in FY21. Medium-term target raised to 25-30% of AUM.

Maintain ACCUMULATE, DDM-based target price for Ascott Residence Trust raised from S$1.19 to S$1.23.

Ascott Residence Trust's 4Q21 RevPAU grew 24%/74% q-o-q/y-o-y) on the back of higher occupancy and ADRs. Average portfolio occupancy improved q-o-q from ~55% to ~60%. Demand from both corporate and leisure segments returned as travel restrictions were eased and economic activities picked up.
Amongst Ascott Residence Trust’s key markets, US (-275.7%), UK (92.3%) and Australia (+54.2%) registered the strongest y-o-y gross profit growth. US reversed its S$7mil gross loss in FY20 and recorded FY21 gross profit of S$12mil, of which ~S$7mil or 57% was attributed to the acquisition of five student accommodation assets in FY21.
The impact of reopening of borders and relaxation of domestic mobility was reflected in the 48% growth in gross profit from a management contract.
Revenue and gross profit from master leases and MCMGI were stable, down 2-5% due to closure of two WBF properties in Japan, reclassification of Park Hotel Clarke Quay from master lease to management contract in 2H21, divestment of two properties in France and change in rent structure of French master leases, partially offset by the absence of rent abatement in FY21.

Ascott Residence Trust divested S$580mil in assets at exit yields of ~2% in FY20/21. In FY21, it invested S$785mil into the long-stay segment at higher EBITDA yields of ~5%. Long-stay assets acquisitions announced in FY21 included eight US student accommodation assets and three Japan rental housing assets.
Apart from replacing divested income, these long-stay assets provide income visibility, providing a stable base of earning for Ascott Residence Trust.

Throughout the year, operations affected by the tightening and easing of restrictions. Restrictions were imposed and travel bubbles were delayed in various countries due to the emergence of the Delta and Omicron variants, resulting in softer demand in certain months. Demand for travel was evident from the uptick in bookings during periods when restrictions were eased.
While more governments are adopting an endemic stance, knee-jerk effects from new, severe variants could still trigger the imposition of restrictions.

Two assets turned operational in Nov 21 - Lyf One-North Singapore (LONS) and vovo Times Square.
- Ascott Residence Trust received strong demand for LONS, achieving 96% occupancy for the 140 of 324 units launched in the first phase of opening. LONS secured 1–6-month bookings from companies and educational institutions in the vicinity. LONS received its TOP in Jan 22 and the remaining units are expected to be operational by end-February. Given that the development of LONS began in 2018/19, construction costs were not significantly impacted by higher costs during the pandemic. As such, the yield on cost for this asset was in line with initial projection of ~6%.
- The launch of voco Times Square in Nov 21 was timely, given the pick-up in domestic and international travel in the US, which resulted in a 68% q-o-q RevPAU growth in 4Q21.
A base of stable earnings is highly valued in a hospitality counter, in our view. Ascott Residence Trust raised its medium-term target allocation in long-stay assets from 15-20% of AUM to 25-30%. Long-stay assets, such a student accommodation and rental housing properties, cater primarily to the domestic demand and have maintained occupancy above 95% throughout FY20-21. The average length of stay ranges 1-2 years with bookings secured several months ahead, providing income visibility and stability to mitigate the more volatile corporate and leisure travel-related earnings.

Our FY22e-25e DPUs estimate for Ascott Residence Trust have been lowered by 4.9-11.5% as we push back recovery from FY23 to FY24. Despite a slight increase in cost of equity from 8.10% to 8.14%, our DDM-based target price for Ascott Residence Trust rises from S$1.19 to S$1.23 as we roll forward our forecast.
Ascott Residence Trust remains our top pick in the sector owing to its mix of stable and growth revenue and geographical diversification.
See
Current Ascott Residence Trust share price implies FY22e/23e DPU yield of 5.0%/5.7%.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2022-02-10

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.23 UP 1.190