CapitaLand Ascott Trust 3Q22 - Phillip Securities 2022-11-01: Rebound Underway

CAPITALAND ASCOTT TRUST (SGX:HMN)

CapitaLand Ascott Trust 3Q22 - Rebound Underway

No financials provided in this business update. CapitaLand Ascott Trust (SGX:HMN)'s 3Q22 gross profit is at ~90% of pre- COVID-19 levels. Portfolio RevPAU jumped 88% y-o-y to S$132 due to higher average daily rate and occupancy (>70%), and is ~87% of 3Q19 pro forma RevPAU.
76% of CapitaLand Ascott Trust's debts is at fixed rate. Every 50bps rise in interest rates would impact CapitaLand Ascott Trust's DPU by ~2%.

Upgrade CapitaLand Ascott Trust to BUY, with DDM-based target price lowered from S$1.24 to S$1.13.
FY22e-FY24e DPU forecast for CapitaLand Ascott Trust is lowered by 5-7% on the back of foreign currency headwinds and an enlarged share base from the private placement as we pencil in the acquisition of S$318.3mil in assets. Our cost of equity increased from 8.14% to 8.34% on a higher risk-free rate assumption.

Y-o-y improvement was driven by both higher average daily rates (ADRs), which is up ~50% y-o-y in 3Q22, and higher occupancy of > 70% in 3Q22 (3Q21: 55%).
All markets experienced strong RevPAU growth y-o-y except for China and Japan, with Australia, US and UK RevPAU close to pre-COVID-19 levels.
- Singapore exceeded pre-COVID-19 levels with the F1 Singapore Grand Prix boosting demand.
- Japan’s 3Q22 RevPAU was 12% lower y-o-y due to a strong base as Tokyo properties benefitted from the Olympic Games in 3Q21. Growth in Japan could pick up quickly after its reopening, supported by the weak yen and its popularity as a tourist destination.

Occupancy of the longer stay properties remained stable at > 95%. Student accommodation is 99% leased for the academic year 2022-2023, with above market rent growth of ~6% y-o-y. The proposed acquisition of 9 properties in France, Japan, Vietnam, US and Australia will increase the proportion of longer-stay asset allocation from 17% to 19%, keeping CapitaLand Ascott Trust on track to achieve its target asset allocation of 25-30%.
Longer-stay accommodation offers income stability as the hospitality properties capture growth from recovering markets.

CapitaLand Ascott Trust managed to maintain its low effective borrowing cost at 1.7% this quarter after repaying and refinancing the majority of debt due in 2022, with only RMB debts remaining. Every 50bp change in interest rates would have a ~2% impact on DPU.

The impact of foreign exchange after hedges in place on gross profit was 2.1% for 9M22. CapitaLand Ascott Trust adopts a natural hedge wherever possible by borrowing in the currency of the underlying assets.
A 5% depreciation in foreign currency implies a ~3% impact to CapitaLand Ascott Trust's DPU.

Forward bookings indicate sustained pent-up demand, with more corporate and international travel returning, enabling CapitaLand Ascott Trust to raise room rates and abate rising utility and labor costs. Electricity cost has increased but remain < 10% of OPEX. Most of CapitaLand Ascott Trust’s electricity requirements have been hedged through fixed rate contracts. Electricity charges are passed through to tenants in US student accommodation and Japan rental housing properties, while utility usage above a certain threshold will be passed through to guests in long-staying SRs.
In terms of capital management, CapitaLand Ascott Trust’s gearing of 35.8% means a debt headroom of ~S$2bn, leaving room for it to reach its medium term asset allocation of 25-30% for longer-stay accommodation.

Our FY22e-FY24e DPU forecast for CapitaLand Ascott Trust is lowered by 5-7% on the back of foreign currency headwinds and an enlarged share base from the private placement. We also pencilled in the acquisition of S$318.3mil in assets that are expected to be completed in 4Q22.
Our cost of equity increased from 8.14% to 8.34% on a higher risk-free rate assumption.
Catalysts for CapitaLand Ascott Trust include the reopening of China, opportunistic divestments, and acquisitions of extended stay assets to raise the proportion of stable income sources to 25-30% to cushion the impact from recessionary concerns, rising inflation and macroeconomic uncertainties.
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CapitaLand Ascott Trust remains our top pick in the REIT sector with its geographically diversified portfolio, range of lodging asset classes, stable income base which has proven its resilience through COVID-19, and a strong sponsor.

Darren Chan Phillip Securities Research | https://www.stocksbnb.com/ 2022-11-01

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