Ascott Residence Trust (CapitaLand Ascott Trust) - UOB Kay Hian 2022-09-26: Increasing Resiliency Through Pivot To Longer-Stay Accommodation

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ASCOTT RESIDENCE TRUST (SGX:HMN)

Ascott Residence Trust (CapitaLand Ascott Trust) - Increasing Resiliency Through Pivot To Longer-Stay Accommodation

• Ascott Residence Trust (SGX:HMN) is acquiring three serviced residences in Australia, France and Vietnam, five rental housing properties in Japan and an additional 45% stake in student accommodation The Standard at Columbia in the US for S$318.3m.
• The acquisitions expand Ascott Residence Trust’s exposure to longer-stay accommodation from 17% to 19% of portfolio valuation and are accretive to 2021 DPU by 2.8%. Ascott Residence Trust's distribution yield is expected to improve from 4.9% for 2022 to 5.8% for 2023.

Strengthening presence in key markets – Australia, France, Japan, the US and Vietnam

• See Ascott Residence Trust's announcement dated 2022-08-15 – Ascott Residence Trust has acquired the following 9 properties from its sponsor The Ascott Limited at a total capitalised cost of S$318.3m:
  1. Three serviced residences −
     • Quest Cannon Hill in Brisbane, Australia,
     • Le Clef Tour Eiffel Paris in France, and
     • Somerset Central TD Hai Phong in Hai Phong, Vietnam.
  2. Five rental housing properties in Kyoto, Osaka, Hyogo and Nagoya in Japan.
  3. An additional 45% stake in The Standard at Columbia near University of South Carolina, which is currently under development and slated for completion in 2Q23, brings its interest in the student accommodation property to 90%.

Pivot to longer-stay properties in Japan and the US.

• The acquisitions deepen Ascott Residence Trust’s presence in its key markets of Australia, France, Japan, the US and Vietnam. The nine properties have 1,018 units and expand Ascott Residence Trust’s total assets by 7.8% to S$8.3b. Longer-stay accommodation will expand from 17% to 19% of portfolio valuation, bringing Ascott Residence Trust closer to its target of 25-30%. Like most student accommodation properties, The Standard at Columbia has an average length of stay of one year. The five rental housing properties in Japan have typical lease tenure of two years.
• Serviced residences have healthy occupancies.
  • The luxurious Le Clef Tour Eiffel Paris has healthy occupancy of 80% and its average daily rate (ADR) was already 30% above pre-pandemic levels as of Jul 22. It is located near many tourist attractions, such as the Eiffel Tower, Arc de Triomphe and Avenue Champs-Elysees. The property will remain operational during refurbishment, which is targeted for completion by end-24. Paris will be hosting the Summer Olympics in 2024.
  • Quest Cannon Hill’s occupancy is healthy at 95%.
  • Somerset Central TD Hai Phong’s occupancy is over 90%. The property caters mainly to corporate guests and has an average length of stay of 11 months. Hai Phong is the top destination for foreign direct investments in Vietnam.

Strengthening resiliency through pivot to longer-stay accommodation.

• The acquisitions strengthen Ascott Residence Trust’s position as the largest hospitality REIT in the Asia Pacific region. Resiliency is enhanced with expansion in longer-stay properties, such as student accommodation and rental housing.
• Expansion of EBITDA yield. The weighted average EBITDA yield for the acquired properties was 4.5% in 2021 (without contribution from The Standard at Columbia). EBITDA yield would improve to 5.0% on a stabilised basis when The Standard at Columbia is completed and starts contributing.
• Acquisition is DPU accretive. The acquisition is accretive to 2021 DPU by 2.8% assuming:
  1. There is no contribution from The Standard at Columbia, which is currently under development.
  2. Funding mix between equity and debt at 46:54. Ascott Residence Trust’s aggregate leverage is expected to edge slightly higher to 38.5%.
  3. Management expects cost of additional borrowings at below 1.7%.
  4. The issue price of new units for private placement is assumed at S$1.064.
• The acquisition was approved by unitholders during an EGM held on 9 Sep 22 (See Ascott Residence Trust's announcement dated 2022-09-21 for the EGM minutes). It is expected to be completed by Nov 22.

Ascott Residence Trust – Earnings forecast revision and recommendation

• We trimmed our 2023 DPU forecast for Ascott Residence Trust by 1.6% after factoring in:
  1. acquisitions of four rental housing and one student accommodation properties in Japan for S$125m announced in Mar 22, and
  2. acquisitions of nine properties in Australia, France, Japan (five rental housing properties), the US and Vietnam for S$318m.
• Ascott Residence Trust has hedged 79% of its borrowings to fixed interest rate. Unfortunately, the Fed had just hiked the Fed Funds Rate by 75bp to 3.00% on 21 Sep 22. We expect the Fed Funds Rate to hit 4.25% by end-22. Ascott Residence Trust’s cost of debt is expected to increase from 1.7% in 2Q22 to 2.15% in 2023.
• 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.
• Maintain BUY recommendation on Ascott Residence Trust with target price based on DDM (cost of equity: 7.25%, terminal growth: 2.6%).
• Catalysts to Ascott Residence Trust's share price include:
  • Yield-accretive acquisitions for student accommodation and rental housing.
  • Full-year contributions from maiden development project lyf one-north in 2022.
  • Recovery of the hospitality industry in Europe, Americas, Japan and Singapore, followed by ries in the Asia Pacific region.

Ascott Residence Trust has changed its name to CapitaLand Ascott Trust (SGX:HMN) w.e.f 2022-09-30.

Jonathan KOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-09-26

SGX Stock Analyst Report BUY MAINTAIN BUY 1.36 UP 1.350