The Positives
+ Divesting above book despite COVID-19. ART executed two divestments in 4Q20. Somerset Azabu East Tokyo was divested in December 2020 for S$76mn. The divestment was 63% above book valuation, representing a divestment yield of 2% and net gain of S$30.6mn. Its S$13mn divestment of Citadines City Centre Grenoble in France will be completed in 1Q21, at 35% above book, producing a net gain of S$44k. Earlier in the year, ART divested Ascott Guangzhou and Citadines Didot Montparnasse Paris for S$159mn and S$36mn, 52% and 69% above book respectively. Divestments of Citadines Xinghai Suzhou and Citadines Zhuankou Wuhan were terminated as the buyer encountered cashflow difficulties. ART will retain the deposit of S$9.5mn as termination compensation.
+ Balance sheet remained robust; cost of borrowing fell from 2.3% to 1.8%. ART had S$487mn cash on hand (FY19: S$276mn), which should be able to cover about three years of operations. It had an additional S$560mn in available credit facilities and net divestment proceeds pending receipt. Gearing was 36.3%, with S$1.9bn of headroom to reach the 50% gearing limit. In total, it has S$200mn in divestment proceeds for deployment.
The Negatives
– 2H/FY20 RevPAU down 69%/61% YoY. RevPAU in seven of ART’s markets was down 56-86% in 2H20. China (-27% YoY) was the lease impacted. Domestic travel returned to pre-pandemic levels in 3Q and most of 4Q. Domestic travel fizzled out in 4Q20 due to a resurgence of the COVID-19 virus in China, France, Japan, the US and Vietnam.
– Portfolio valuation fell 7% YoY, as valuers factored in weaker performances due to COVID-19 and higher cap and discount rates. According to the United Nations World Tourism Organisation, a recovery to 2019 levels could take 2.5-4 years. This will affect cashflow estimates in valuations. Nonetheless, ART has delivered several divestments at above book values, indicating that while the road to recovery is long, its well-located assets are still well sought-after.
– Some S$18mn in rental rebates were offered to tenants in Australia and France. However, ART also benefitted from S$17.3mn in wage subsidies from various governments in the markets in which it operates.
What’s New?
Expansion of investment strategy and proposed acquisition of purpose-built student accommodation (PBSA). The PBSA, Signature West Midtown, is located within a 5-10-minute walk from the Georgia Institute of Technology (Georgia Tech) in Atlanta, US. Total acquisition cost for the 183-unit/525-bed PBSA is S$130.mn, which has an EBITDA yield of 5%. The acquisition will add 4.4% DPU on a proforma basis. Georgia Tech is ranked the 35th top university in the US and second in Georgia. Domestic students account for 95% of its [or all universities?] US student population, with 80% living in student accommodation. As such, occupancy for PBSAs in the US is around 90% throughout the year.
What Do We Think?
Acquisition of student accommodation to shore up revenue. In May 2020, four French master leases were renewed on variable terms while three UK management contracts with minimum guaranteed income (MCMGI) were renewed as management contracts. An additional 15 French master leases were renegotiated as MCMGIs in December 2020, effectively lowering the amount of fixed, stable rents and introducing a variable rent component. Their high occupancy and longer average stay of about one year should help to increase income stability, especially since COVID-19 has set a new historical low for the hospitality sector. COVID-19 may result in more master leases and MCMGIs renewed at lower fixed rents or the conversion of master leases into MCMGIs.
Outlook
Vaccine rollout and domestic tourism campaigns have provided a boost to the hospitality sector. There has been a gradual resumption of MICE and sporting events such as the Australian Open tennis competition in January and World Economic Forum to be held in Singapore in May 2021. Corporate travel has also ticked up. The tourism industry is expected to improve further, with a full recovery expected in 2023/24.
Maintain BUY, DDM-based TP raised from S$1.15 to S$1.17
Our DDM-based TP was raised to S$1.17 as we roll forward to FY21e earnings forecast. We are forecasting FY21e/22e DPU yield of 4.2%/5.5%, with an upside 1.4% upside to our TP.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
