+ $843mn in cash and credit facilities sufficient to cover c.2 years of fixed cost, comprising $620mn in cash & committed credit facilities, $163mn in cash proceeds from divestment of Somerset Liang Court received in July 2020 and $60mn uncommitted credit facility secured in July 2020. We note that ART’s interest coverage ratio deteriorated QoQ from 5.1x to 3.6x, however the cash and credit facilities in place will help to weather this period of depressed earnings.
+ Alternative sources of revenue to help fill occupancy (1H20: c.50%, 1Q20: c.40%). International travel bans are still largely in place. However, ART has been able to tap into alternative sources of revenue such as government bookings as quarantine facilities (SG) and temporary facilities for healthcare workers and COVID responders (US). Figure 2 summarises sources of alternative revenue. ART may benefit from the lifting of domestic travel restrictions in certain countries and the respective government initiatives to spur domestic travel.
- 1H20 RevPAR fell 52% YoY; 12 properties remain closed, comprising 11 properties in France (ML), 6 in Japan (2 ML, 2 MC), and 1 each in Belgium (MGMGI), Spain (MCMGI) and South Korea (ML). Some of the properties were mandated to close by the government and others were close due to soft demand (Paris) or to optimise resources. RevPAR for all countries deteriorated further (Figure 1) due to lower occupancies (1H20: 50% vs 1H19: 80%) and room rates, except for SG, which improved 5ppts from -30% to -25%, largely due to block bookings by the government.
- Erosion of “stable” revenues as 4 French ML and 3 UK MCMGI leases were renewed on variable terms. ART extended 7 expiring leases with the sponsor, albeit on variable terms. 4 expired French master leases extended on variable rent terms for 1 year w.e.f. 25 March 2020 and 3 expired UK MCMGI converted to management contracts for 1 year w.e.f. 1 May 2020. In 1H20, ART received income top-up of GBP1.0mn for the MCMGIs in UK.
WBF Hotels & Resorts (WBF), the master lessee in 3 Japan properties, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April 2020. These 3 properties are located in Osaka (of which 2 are closed) and make up c.1.8% of ART’s valuation. They would have contributed S$6.7mn in rent on a full-year basis. WBF has paid rent up till April 2020 and 3 months’ worth of security deposits have been used to offset rent until July. WBF is Japanese owner-operator, with 15 properties on their books and managed 30 properties. ART is in discussions with WBF, Sponsor The Ascott Limited (TAL) and other operators, to take over operations, if necessary. TAL operates 8 SRs in Japan, 4 of which are under ART’s portfolio.
Apart from the 3 WBF ML, 10 other assets are master leased to third party operators.
Unlocking value through divestments
In July 2020, ART entered into two conditional agreements to divest Ascott Guangzhou (AGZ) and Citadines Didot Montparnasse Paris (CDMP) for c.S$191.4 million, at 52% and 69% above their respective book values. ART is expected to realise total estimated net gains of about S$23.2 million upon the completion of both transactions. The exit yields for AGZ and CDMP were 3% and 4% respectively. Including these transactions, ART will have
Maintain BUY with a lower target price of $1.08 (prev. $1.25).
We lower revenue to reflect a slower recovery of international travel, the extension of 4 French ML and 3 UK MCMGI on variable terms, and the sale of AGZ and CDMP. FY20e DPU is lowered 21.7% and represents a DPU yield of 6.0%.
Singapore-listed Ascott Residence Trust (ART) is a hospitality trust with a market cap of S$2.5bn. Its portfolio of serviced apartments, business hotels and rental housing spans 15 countries and 39 countries totalling 88 properties after its merger with Ascendas Hospitality Trust. Majority shareholder, CapitaLand Ltd (40%), is the parent company of ART’s sponsor, The Ascott Limited, and its managers Ascott Business Trust Management Pte Ltd and Ascott Residence Trust Management Ltd.
Revenue is derived from 3 types of property leases
+ Enough liquidity to sustain >2 years of operations with zero revenue. ART has a cash balance of S$300mn, credit facilities of S$425mn (of which S$200mn is committed capital available for use), and incoming cash proceeds of S$163mn from the divestment of Somerset Liang Court Singapore in July 2020. This totals S$888mn in liquidity. Basing off FY19 annual operating expenses of S$293mn and interest expenses (including perp distributions) of S$71mn, ART will be able to sustain operations and interest expenses for >2 years without any revenue. We note that operating expenses will also be reduced amidst reduced operations (18 properties temporarily closed as at 30 April 2020).
+ Hotel occupancies showing improvement as countries reopen. Early in June, Marriott, the world’s third largest hotel chain, reopened all of its hotels in China as business and leisure travel recovered. The group was upbeat, stating that occupancy rate was now at 40%, from a low of 7% in late January. While hotel room and occupancy rates may not recover to pre-COVID levels any time soon, we expect a decent recovery as borders are opened and lockdown measures are eased. 8% of ART’s gross profits come from China.
+Large debt headroom of S$1.2bn with 69% of assets unencumbered to help ART through debt maturities. With gearing levels at 31.2% as at 31 March 2020, ART has a debt headroom of S$1.2bn before reaching the MAS REIT leverage ceiling of 50%. With connections to Capitaland and 69% of assets unencumbered (S$2.34bn of available loan amount assuming LTV of 60%), access to funding will be smooth.
With the risk of loss of property values amidst COVID-19, we note that ART’s portfolio can lose 38% before gearing levels reach the MAS 50% gearing limit (assuming constant debt levels). As a reference, hospitality valuations fell 6% during the GFC. With regards to perpetual bondholders, ART’s asset values can fall 63% before perpetual bondholders take a haircut.
- Risk of non-renewal of expiring master leases mitigated by links to sponsor.2% of master leases in terms of gross rental income (GRI) is due to expire in 2020. Master leases contributed 27% of ART’s total gross profits in FY19. While the master lease expiries may be a material concern, we note that ART’s sponsor The Ascott Limited contributes 66% of master leases gross profits (or 18% of total gross profits) in FY19. With ART’s sponsor as a major lessee of ART’s master leases, we think that non-renewal risk is reduced with sponsor support.
On 27 April 2020, WBF Hotels & Resorts (WBF), the master lessee of 3 Japan properties, filed for civil rehabilitation (bankruptcy). The 3 properties made up 1.8% of ART’s valuation that would have contributed S$6.7mn (1.3% of FY19 total revenue) in rent on a full-year basis. The impact of the default is small given ART’s large and diversified portfolio, and ART has 3 months’ worth of security deposits for the leases.
+ Balanced lease structure mitigates the impact of COVID-19 outbreak. ART targets a 50:50 split between stable and growth (variable) revenue. Stable revenue is generated by leases that stipulate a minimum rent that ART can expect to receive (master leases (ML) and management contracts with minimum guaranteed income (MCMGI)), while the growth revenue is from assets on management contracts, where ART’s revenue is based on the occupancy and room rates charged. The Sponsor, The Ascott Limited (TAL), is the master lessee of Ascott-branded SRs that are on ML and we do not foresee any default risk related with TAL. However, the master lessee of in 3 of the ML assets in Japan, WBF Hotels & Resorts, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April (elaborated below). Apart from the 3 WBF ML, 10 other assets are master leased to third party operators.
+ Occupancies at MC assets above breakeven occupancy (c.40%). ART enjoys a relatively high steady-state occupancy level due to the long-staying clientele that their portfolio of 59 Serviced Residences (SRs), 11 rental housing and 18 hotels/business hotels. We understand from the management that baseline occupancy from long-stay clients are in the 40% to 50% region. Figure 1 outlines ART’s performance in the key markets that ART operates in and Figure 2 shows the average length of stay by country.
+ Pursuing alternative sources of revenue to shore up occupancy. While most of the countries ART operates in have enacted lockdowns and bans on international travel, alternative sources of revenue have emerged. In Singapore, occupancies fell to c.60% in March, however, block booking of Park Hotel and Somerset Liang Court by the government as quarantine facilities, Malaysians affected by the border closure and those choosing to self-isolate in hotels/SRs have helped to bump occupancy up to c.80%. Similarly, DoubleTree by Hilton New York (80% occupancy for April/May) and Sheraton Tribecca New York’s occupancies were lifted by healthcare workers and COVID-19 responders.
- 18 properties temporarily closed as at 30 April 2020, comprising 11 properties in France (ML), 4 in Japan (2 ML, 2 MC), and 1 each in Belgium (MGMGI), Spain (MCMGI) and South Korea (ML). Some of the properties were mandated to close by the government and others were close due to soft demand (Paris) or to optimise resources.
WBF Hotels & Resorts (WBF), the master lessee in 3 Japan properties, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April 2020. These 3 properties are located in Osaka (of which 2 are closed) and makeup c.1.8% of ART’s valuation. They would have contributed S$6.7mn in rent on a full-year basis. WBF has paid rent up till April 2020 and 3 months’ worth of security deposits are held in escrow. WBF is Japanese owner-operator, with 15 properties on their books and managed 30 properties. ART is in discussions with TAL, amongst other operators, to take over operations, if necessary. TAL operates 8 SRs in Japan, 4 of which are under ART’s portfolio.
Perps - S$250mn 3.86% perps are callable in June 2020. Several options are available to ART, all of which should result in cost savings. ART can let the coupon reset (next rate will be c.3.4%, with an option to call the perps every 6 months), call the preps and reissue new perps, refinance the perps with debts (gearing will move to c.39%). In this current climate, we think ART will likely let the coupon reset at a lower rate. For reference, ART refinanced S$150mn 5% of perps with S$150mn 3.88% perps in September 2019, capturing c.S$1.7mn in savings.
Deferrals – Some operators have asked for rental deferments. Deferred rent will be paid in instalments over the next two quarters.
Revaluation risk – Drawing on the GFC for reference, valuation fell by c.6%.
Lease renewals (of MLs) – All of the master leases due for renewal are with the Sponsor, hence renewal risk is low.
Bank Covenants – Sufficient buffer of 30% to 50% on LTV covenants. ART has negotiated with their lenders to have the ICR testing covenant waived temporarily.
Maintain BUY with a lower target price of $1.17 (prev. $1.53).
We lowered our FY20e gross profit (NPI) forecast by 13.9%, reducing our RevPAU estimates by 20% to 30% for the full year. FY20e DPU has been cut by 15.4% to 6.87cents, representing a yield of 8.0%. The change in our target price is largely due to the higher cost of equity assumptions incorporated in our valuation, raised from 7.2% to 8.5%.
The merger with Ascendas Hospitality Trust was completed 31 December and will contribute to ART’s portfolio from 1 January 2020. Figure 2 and 3 show the breakdown of ART’s gross revenue by geography and lease type with the contribution from AHT’s master leases assets in Japan (5), Korea (2) and Singapore (1) and management contract assets in Australia (6).
Inclusion into the FTSE Nareit Developed Index is likely given that ART has met the criteria for inclusion.
Impact of the Novel Coronavirus
The management expects that travel volumes will be impacted in the short-term, as well as some cancellation of bookings. However, given ART has more long-term stays than short-term stays which are driven by corporate clients on project groups or secondment and less leisure-tourism dependent, we expect to be more protected than other hospitality REITs. Figure 4 shows the average length of stay at their accommodations by country, which ranges 1 to 7 months.
Upgrade to BUY with a higher target price of $1.53 (prev. $1.36).
Our forecast includes the contributions from the AHT portfolio as well the announced divestments of Somerset Hanoi, partial divestment and redevelopment of Somerset Liang Court and the divestment of the 2 Citadines assets in China. The recent collapse in the share price due to the uncertainty caused by the Novel Coronavirus presents a good entry price, in our opinion. We upgrade our recommendation to BUY from ACCUMULATE. ART is trading at an attractive yield of 6.6% and P/NAV of 0.94.
Ascott Residence Trust (ART) is a Singapore-listed hospitality trust that owns serviced residences, rental housing properties and other hospitality assets. As of 30 June 2019, its total assets stand at S$5.5bn comprising of 74 properties with >11,700 units in 14 countries. ART is managed by Ascott Residence Trust Management Limited, a wholly-owned subsidiary of CapitaLand Limited.
Operating model - 3 types of leases:
(+) Strong credit profile
(+) Income stabilized by hybrid hospitality operating model
(-) Substantial room supply hitting key markets, however, diversified portfolio reduces impact
(+) Strong credit profile – As at 30 June 2019, the Trust’s gearing ratio stood at 32.8%, which is relatively under-geared against the 45% gearing ceiling for REITs. Interest coverage was at a healthy 5.2x, which is comparable to other hospitality trusts, and effective borrowing cost was significantly low at 2.1% given an investment-grade rating by Fitch of ‘BBB’.
c.88% of debt are on fixed terms, mitigating the impact of interest rate volatility. Weighted debt expiry is fairly long at 3.9 years with no major refinancing in the short term.
S$150mn and S$250mn of fixed-rate perpetual securities with rates at 5.00% and 4.68% per annum respectively have upcoming call dates of 27 October 2019 and 30 June 2020 respectively. This gives ART opportunities to refinance at lower rates given the current low-interest-rate environment.
In addition, the planned merger with Ascendas Hospitality Trust by end-2019 could improve credit ratings from being an enlarged combined entity, potentially reducing borrowing rates further.
As for growth plans, ART currently has a right-of-first-refusal (ROFR) pipeline of 20 properties. ART’s sponsor, Ascott Limited has a target of 160,000 units by 2023, with 100,000 units as at 21 January 2019.
(+) Income stabilized by hybrid hospitality operating model – Unlike hotels, ART owns serviced residences that offer limited services compared to the full range of services. Serviced residences attract a guest base with purpose of expatriates’ relocation, corporate assignments, project groups and extended-stay. Such a guest base make up a significant portion of ART’s guests, which bring less cyclical compared to hotels, which are primarily tourist driven.
For the period 2QFY2019, c.39% of ART’s gross profit was derived from stable streams (master leases and MCMGI) while c.61% was derived from more variable management contracts. Weighted average tenure of stable income contracts of approx. 5 years.
(-) Substantial room supply hitting key markets, however diversified portfolio reduces impact – High upcoming room supply in ART’s operating countries, namely Japan, China, Germany, UK, Vietnam and Australia, will put downward pressure on RevPAU. This is mitigated by ART’s diversified portfolio, of which no geography accounts for more than 15% of gross profit.
As mentioned in the previous reports, recent acquisitions (CCSA) and divestments (Ascott RP) has cause ART to temporarily deviate from their targeted 50/50 growth/stable revenue structure. ART has expressed that future acquisitions will aim to restore the 50/50 balance (the proposed ART-AHT merger will also help to rebalance the structure).
ART is paying 5% coupon on $150mn perpetual securities that are callable in October 2019. Given the favourable interest rate environment, we believe ART will call the perpetual and reap saving on new perps issued. ART has another $250mn tranche of perps with a coupon of 4.68% will be callable in June 2020.
Maintain ACCUMULATE with an unchanged target price of $1.36
We reiterate our ACCUMULATE on ART due to geographical diversification, upside exposure from management contracts (“growth” revenue) and ability to acquire accretively due to S$1.1bn debt headroom and low cost of funding (2.3%). This translates to a dividend yield of 5.4% and a FY19e P/NAV of 0.96x.
What’s in the news?
Immediate DPU accretion is a strong case for the combination of ART-AHT. The combination will result in a more geographically diversified entity, positioned to capture growth in APAC markets. Inclusion in the FTSE Nareit Index will be the cherry on the top.
Downgrade to ACCUMULATE, unchanged target price of $1.36.
We downgrade our call to ACCUMULATE due to the recent appreciation in the share price. This translates to a dividend yield of 5.5% and a FY19e P/NAV of 0.88. No change in our target price as the transaction is still pending shareholder approval.
Better performance is expected from US and Indonesia due to higher RevPAUs post-AEI, driven by higher occupancy and average daily rates (ADRs). The two assets undergoing AEI, Element NY Times Square and Somerset Grand Citra Jakarta, are slated for completion in 2Q19.
Maintain Buy; unchanged target price of $1.36
We reiterate our Buy on ART due to geographical diversification, upside exposure from MC and ability to acquire accretively due to S$880mn debt headroom and low cost of funding (2.3%). This translates to a dividend yield of 5.9% and a FY19e P/NAV of 0.88.
Ascott Residence Trust (ART) is an owner-operator of serviced residences (SRs) with 79 properties totalling 11,430 keys spanning 14 countries. c.85% of gross profit is derived from its eight key markets – namely, the US, Japan, UK, France, Vietnam, Singapore, China and Australia. ART’s SRs, excluding its US properties, are operated under three core brands – Ascott, Citadines and Somerset. Ascott Limited, ART’s sponsor, is a wholly-owned subsidiary and the hospitality arm of Mainboard-listed CapitaLand Limited (market cap S$15.3bn).
41% of gross profit is stable, derived from master leases (ML) and management contracts with minimum guaranteed income (MCMGI) while the remaining 59% is derived from management contracts (MC), thus providing upside potential. 70% of the room stock is for long-term stays and the remaining 30% for higher-yielding short-term stays. 75% of EBIT is sourced from five core developed markets.
ART’s Sponsor, Ascott Limited, has grown its presence at a CAGR of 36.5% over the past three years to 100,000 keys over 172 cities across 33 countries as at 21 January 2019. Ascott Limited is targeting 160,000 keys by 2023. ART is poised to benefit from Ascott’s brand awareness and economies of scale. ART currently has a right-of-first-refusal (ROFR) pipeline of 20 properties. Following the divestment of Ascott Raffles Place, ART’s gearing is expected to fall 2.2pp from 36.7% to 34.5%. Given ART’s significant asset base of S$5.3bn, this translates to a debt headroom of c.S$880mn (assuming a 45% gearing level).
With 70% of room stock used for long-term stays, less wear and tear is observed in comparison with hotels as there are less frequent turnovers. In addition, SRs only offer limited services, unlike hotels which offer a full range of services, which translates into lower CAPEX and manpower requirements.
Initiating coverage with BUY rating and target price of S$1.36
We initiate coverage on ART with a BUY rating and a DDM-derived target price of S$1.36. This implies a 21.5% upside and a FY19e P/NAV of 0.80.
ART’s assets are leased out on three different types of leases – master lease (ML), management contract with minimum guaranteed income (MCMGI) and management contracts (MC).
Figure 1: Characteristics of different leases under ART
Figure 2: Gross profit by revenue model
Under a triple-net lease, master lessors are responsible for the property taxes, insurance and maintenance, resulting in high gross profit margins. Due to the longer lease terms, the master leases in France, Germany and Australia are subject to annual rental reversions pegged to the consumer-price index (CPI). Ascott Orchard’s lease includes an additional variable component.
Operating income from management contracts are dependent on the RevPAU of each asset. RevPAU is a function of the occupancy rate and the average daily rate (ADR). Income is tied to the profitability of the SR and ART is responsible for the day-to-day cost of operations as well as CAPEX outlays. Hence, profit margins for this revenue model have a wider range and are thinner compared to MLs.
Management contract with minimum guaranteed income (MCMGI)
Similar to management contracts, MCMGIs are driven by RevPAU and profitability of the SR. However it is downside protected as the operator guarantees to pay the shortfall should income be lower than the pre-agreed minimum income level. MCMGIs allow ART to participate in the upside of the SRs. All of ART’s MCMGI assets are currently contributing more than the minimum guaranteed income.
With the divestment of Ascott Raffles Place (previously under master lease) and acquisition of Citadines Connect Sydney Airport and Lyf One-north (to be operated under management contract), a higher portion of gross profit will be derived from management contracts which have lower profit margins associated with them. Corresponding, we expect gross profit margins to deteriorate 1pp from 46.5% in FY18 to 45.5% in FY20.
Figure 3: Gradual shift towards revenue derived from management contracts
Demand drivers for SRs
ART’s longer stays are driven by the corporate segment which clock in stays ranging from a month to two years. Some business travellers are MICE organisers or expats on overseas project group assignments that last between 3 to 6 months. PwC’s talent mobility study show that overseas assignee levels have increased by 25% over the past decade and it is estimated that there will be a 50% increase in overseas assignments in 2020 driven by short-term and commuter assignments.
SRs are priced slightly higher than hotels but units are generally 30-50% larger compared to hotels, hence more competitive on a per square foot level. They are also amenitised with cooking facilities which are favoured by some guests. An Association of Serviced Apartment Providers’ survey on SR operators in the UK reported that across the board, members saw their Chinese-sourced business increase by 5 to 50% YoY in 2018, with majority of the guests from China being leisure travellers.
Figure 4: Gross profit by geographical breakdown
Direct costs comprise staff cost, depreciation and amortisation, property tax and insurance which mostly accrue from the management contract revenue model. Staff costs and depreciation and amortisation account for 20% and 13% of direct costs respectively.
Finance costs include the cost of forex hedging and interest rate swaps. 80% of debt is on fixed terms with 96% of total debt expiring after 2020.
Figure 5: Manager’s management fees
Our valuations have factored the acquisition of Citadines Connect Sydney Airport which was announced on 28 March 2019. Figure 6 below summarises notable transactions that have occurred in the last two years.
Figure 6: Summary of corporate actions
41% of ART’s gross profit is derived from stable streams (master leases and MCMGI) while 59% derived from management contracts provide upside from variability. 70% of room stock is used for long-term stays, with the remaining 30% room stock for higher-yielding short-term stays. The average length of stay in most properties ranges 1 month to 2 years which affords income visibility and cushions transient vacancies or scheduled AEIs.
Figure 7: Length of stay in each MCMGI and MC asset
Additionally, 75% of EBIT sourced from developed markets which further speak to the stability of income. Long term stays are driven by the corporate segment’s business travels, meetings, incentive travel, conventions and exhibitions (BTMICE) needs as well as out stationed executives working in project groups. As such, there is less cyclicality compared with hotel operations, which is primarily tourism driven.
In Singapore, there is a distinction between the licenses meant for long term stays and short term stays. Other countries do not have this distinction. Serviced residence licenses mandate a minimum stay of one week while hotel licenses have no minimum length of stay requirement. Of their four SRs located in Singapore, Ascott Orchard and Ascott RP (divested), which is located along the prime shopping district and CBD respectively, hold the hotel license, allowing them to benefit from the tourist influx in Singapore. These two assets are operated under master lease with a participating variable component. ART has benefitted from this pre-emptive of applying for the hotel license as the average length of stay at Ascott Orchard is currently less than one week.
S$800mn debt headroom for inorganic growth
Post (Ascott RP) divestment gearing expected to fall 2.2pp from 36.7% to 34.5%. Given ART’s significant asset base of S$5.3bn, this translates to a debt headroom of c.S$880mn. This is sweetened by ART’s ability to borrow at a low cost of debt of 2.3%, giving them an advantage over REITs with higher borrowing costs, which means that more projects would be yield accretive to ART.
Riding on Ascott’s brand name and rapid growth
Over the last 3 years, the number of keys under Sponsor Ascott Limited has been growing at a CAGR of 36.5%. from 39,000 to 100,000 keys. The signing of 28 management contracts (totalling 26,000 keys) in China in January 2019 enabled Ascott Limited to achieve their 2020 target of 100,000 keys ahead of schedule. Ascott is targeting to operate 160,000 keys by 2023. In 2018, the global construction pipeline for the hospitality sector reached a high with hospitality heavyweights such as Marriot, Hilton, InterContinental and Accor accounting for 55% of the 13,571 projects/2.3mn rooms in the global pipeline. Developer-operators like Banyan Tree have also refined their strategy, choosing the asset light approach and ramping up the number of keys through management contracts. The strategy of increasing the number of keys globally enables operators to build brand prominence as well as take advantage of economies of scale. With most of ART’s assets operated under the Ascott, Citadines and Somerset brands, ART is poised to benefit from the brand and reputation that Ascott has built.
Figure 8: Ascott Limited’s rapid growth in number of keys
Expanding income base though expansion into new co-living segment
Lyf One-north is ART’s maiden development project and first co-living asset. It is located in Singapore and holds a SR license and will be managed by Ascott. The co-living concept is targeted at executive millennials and expatriates who prefer a more social and experiential environment. One-north is dubbed Singapore’s research and innovation hub, where numerous young entrepreneurs and start-ups congregate. Co-living accommodations have shared common spaces such as living rooms, kitchens, and working spaces. It gives tenants the luxury of typical amenities in a home without having to incur the cost of additional space and investment in furniture and appliances. The sharing economy has enabled co-living operators to reduce individual unit spaces but still provide these amenities without the cost of duplication.
Figure 9: Ascott Limited’s Lyf pipeline
Hmlet, one of the first movers in the co-living space in Singapore, started operations in 2016 and currently has 18 properties totalling 1,000 beds. Hmlet rents and renovates properties to eventually sublet them. Apart from expatriates, their clients include couples that require transitional housing while awaiting the completion of their flats.
Sponsor Ascott Limited has four co-living properties in the pipeline totalling 784 units and intends to increase the number of keys from this segment to 10,000 by 2020. Including ART’s Lyf One-north, there will be 1,080 Lyf units. ART’s Lyf One-north will stand to benefit from the scale and presence of the Lyf brand.
Right of First Refusal (ROFR) Pipeline
Ascott Limited has granted ART the ROFR for its properties - regardless of the developmental or operational stage - that are used as serviced residences or rental housing properties in Europe and Pan-Asian region. Currently, there are currently 20 properties at various developmental and operational stages in ART’s ROFR pipeline.
With 70% of room inventory used for long-term accommodation, less wear and tear is observed in comparison with hotels, which experiences more frequent turnovers. CAPEX is generally broken into two categories, maintenance and improvement CAPEX. Improvement AEIs are undertaken to refresh the property or upgrade the PPE which will translate into higher RevPAU from the improved asset. Maintenance CAPEX is incurred to replace existing PPE and furniture and fittings with similar (or newer model of) equipment to serve the same function, and as such will not increase RevPAU significantly, but rather help to maintain the current RevPAU. We expect less maintenance related CAPEX spending due to less wear and tear, which will provide better profit margins and less disruption to the business from closure of rooms for renovation.
Unlike hotels which offer full range of services, SRs only offer a limited selection of services, which translates into lower CAPEX and OPEX requirement. As master leases are triple-net and only receive a fixed fee (except Ascott Orchard), only properties under MCMGI and management contract will stand to benefit from the CAPEX and OPEX efficiency of SRs. The 11 rental housing properties in Japan are also minimally furnished. Some SRs have F&B outlets on the premise or shared, self-service, pay-per-use amenities such as washing machines. The limited selection of services also corresponds to lower manpower requirements.
CapitaLand-Ascendas Singbridge transaction and overlapping mandates with Sponsor’s parent’s affiliate, Ascendas Hospitality Trust
CapitaLand announced the acquisition of Ascendas-Singbridge on January that is subject to shareholder vote on 12 April 2019. Ascott Limited, ART’s sponsor, is 100% owned by CapitaLand. If the acquisition of Ascendas-Singbridge is approved, CapitaLand will own 27.72% of Ascendas Hospitality Trust (AHT). AHT has 14 assets which are located in Singapore (1), Australia (6), Japan (5) and Korea (2). CapitaLand’s Management commented it would be more likely to merge ART and AHT or divest its stake in either ART/AHT, than to modify the investment mandates of the two REITs.
Substantial room supply hitting several markets that ART is operating in – namely, Japan, China, Germany, UK, Vietnam and Australia - will put downward pressure on RevPAU. There is also risk of unfavourable foreign currency movements in the countries which ART operate. These factors are mitigated by ART’s diversified portfolio which no geography accounts for more than 15% of gross profit. Historically, ART’s forex hedging strategy of hedging distributable income in EUR, GBP, JPY and USD has limited the impact of FX movements on gross profit, keeping it in the range of +/- 1.4% in the last 5 years (impact of FY2017/18 FX fluctuations on gross profit was 0%).
We initiate coverage on ART with a BUY rating and a DDM-derived target price of S$1.36. With a DPU yield of 6.3%, this implies a 21.5% upside. At a discount to P/NAV of 0.80, we find ART to be attractive.
Figure 10: Peer comparison table