CapitaLand Ascott Trust – Further upside from occupancy growth

 

 

 

The Positives

 

 

 

 

The Negatives

CapitaLand Ascott Trust – Occupancy to trend upwards

 

The Positives

 

 

 

The Negatives

 

No financials were provided in this business update.

CapitaLand Ascott Trust – Still room for RevPAU growth

 

 

The Positives

 

 

 

 

The Negatives

 

Outlook

Forward bookings remain healthy, supported by the strong demand from both international and domestic travel. We expect international travel to pick up pace as airline capacity increases – it has not fully recovered to 2019 levels. As corporates seek to optimize their expenses, many are downgrading from luxury to more cost-effective mid-tier mass market accommodation options. CLAS stands to benefit as the bulk of its portfolio comprises properties within the mid-tier segment, making it an attractive choice for cost-conscious corporate clients.

 

We forecast growth in ADRs to moderate as it has already surpassed pre-pandemic levels in some markets, and the driver for RevPAU growth going forward will be from higher occupancy. Portfolio occupancy at 75% is roughly 90% of pre-COVID occupancy.

 

Downgrade from BUY to ACCUMULATE, DDM-based TP lowered from S$1.26 to S$1.20.

FY23e/FY24e DPU is lowered by 4%/6% on higher interest cost assumptions. CLAS remains our top pick in the sector with its geographically diversified portfolio, wide range of lodging asset classes, stable income base which has proven its resilience through COVID-19, and a strong sponsor. We also like CLAS for its balanced mix of stable and growth income sources, which stands at 58% and 42% of gross profit in 1H23 respectively. The current share price implies a FY23e dividend yield of 5.7%.

CapitaLand Ascott Trust – Strong Japan recovery

The Positives

 

 

The Negative

 

Outlook

Forward bookings remain healthy, supported by the strong demand from both international and domestic travel. Corporate travel and business activity continue to be robust, despite some industries facing cost pressures. As of January 2023, global airlines are operating at only 11% of their 2019 capacity levels to and from China. This is expected to increase to 25% by April 2023. China is a key source market for travellers to many countries, and the return of flight capacity is expected to drive outbound travel. In 2019, Chinese travellers accounted for approximately 9% of CLAS' guest count (about 4% in 1Q23) and we think this percentage will increase in the second half of 2023.

 

We forecast growth in ADRs to moderate as it has already surpassed pre-pandemic levels in some markets, and the driver for RevPAU growth going forward will be from higher occupancy. CLAS’ revenue growth has outpaced the increase in operating costs - electricity costs have increased, but it remains less than 10% of OPEX.

CapitaLand Ascott Trust – On the right track

 

 

The Positives

 

 

 

The Negative

 

Outlook

Extended stay segment remains resilient, comprising c.15% of 4Q22 gross profit. Occupancy of the longer stay properties remained stable at >95%. Student accommodation continues to be resilient with 99% leased for the academic year 2022-2023 (vs 95% last academic year), with above market rent growth of c.6% YoY. Longer-stay accommodation offers income stability as the hospitality properties capture growth from recovering markets. 

 

Forward bookings remain healthy, supported by the recovery of both short and long-stay corporate travel. Although there is not much increase in bookings from Chinese tourists, inquiries are strong. In 2019, Chinese travelers contributed about 9% of CLAS’ guests count (3% in 2022), and we expect this to pick up in 2H of 2023.

 

CLAS can raise room rates to abate rising utility and labor costs. Electricity cost increased but remain <10% of OPEX. 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.

 

Four properties will be undergoing enhancements in 2023. They include Riverside Hotel Robertson Quay, which will be rebranded as The Robertson House by The Crest Collection, Citadines Holborn-Covent Garden London, Citadines Les Halles Paris and Citadines Kurfürstendamm Berlin.

 

Maintain BUY, DDM-based TP raised from S$1.13 to S$1.26.

FY23e-FY25e DPU is raised by 1-3% on the continued recovery for hospitality and the reopening of China. Our cost of equity decreased from 8.34% to 7.96% as we roll forward our forecasts. CLAS remains our top pick in the sector with its geographically diversified portfolio, wide range of lodging asset classes, stable income base which has proven its resilience through COVID-19, and a strong sponsor. We also like that CLAS has a good mix of stable and growth income sources of 52% and 48% of 2H22 gross profit, respectively. The current share price implies a FY23e dividend yield of 5.9%.

CapitaLand Ascott Trust – Rebound underway

 

The Positives

 

 

 

 

The Negative

 

Outlook

Forward bookings indicate sustained pent-up demand, with more corporate and international travel returning, enabling CLAS to raise room rates and abate rising utility and labor costs. Electricity cost has increased but remain <10% of OPEX. Most of CLAS’ 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, CLAS’ gearing of 35.8% means a debt headroom of c.S$2bn, leaving room for it to reach its medium term asset allocation of 25-30% for longer-stay accommodation.

 

Upgrade to BUY, DDM-based TP lowered from S$1.24 to S$1.13

FY22e-FY24e DPU 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$318.3mn 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 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. CLAS 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.

Ascott Residence Trust – Strong recovery in RevPAU

 

Investment thesis

  1. Strong recovery in portfolio RevPAU. YoY improvement driven by both higher average daily rates (ADRs), which is up 50% YoY in 2Q22, and higher occupancy of c.70% in 2Q22 (2Q21: 55%). Portfolio RevPAU is currently at 82% of pre-pandemic levels and is expected to recover even further, with US, UK, Singapore and Australia leading the charge. In 2Q22, RevPAU for these countries came in at 86%, 100%, 97%, 96% of 2Q19 respectively, and are expected to maintain or even surpass pre-pandemic levels before the end of the year.

 

  1. Extended stay segment remains resilient, comprising c.20% of 1H22 gross profit. ART’s seven operating student accommodation properties in the USA and three rental housing properties in Japan acquired over the past year have strong average occupancy rate of over 95%. Pre-leasing at the US student accommodations for the next academic year is c.95% on average, with rental growth expected to come in at 8% YoY.

 

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 ART on track to achieve its medium-term asset allocation target of 25-30%. Longer-stay accommodation offers income stability as the hospitality properties capture growth from recovering markets. 

 

 

  1. High proportion of debts at fixed rate, c.79%, locked in for a weighted average of c.3 years. Of the 21% debt that is on floating rates, c.50% is denominated in USD, which is expected to be counter-balanced by c.20% of the debt which is denominated in JPY. ART has a low effective borrowing cost of 1.7%. An additional 25bp change in interest rates would have a c.1% impact on DPU.

 

Outlook

Worldwide international tourist arrivals in 3Q22 are expected to pick up to 65% of pre-pandemic levels, indicative of a faster recovery compared with 1H22, which stood at 46%. The Americas and Europe are leading the recovery in long-haul travel, and the share of travel between the two regions has increased.

 

Forward bookings indicate sustained pent-up demand, with more corporate and international travel returning, enabling ART’s properties to raise room rates and abate rising utility and labour costs. Electricity cost accounts for c.6% of OPEX. Most of ART’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. Every 5% increase in utility cost is expected to impact FY22e DPU by c. 0.25%.

 

In terms of capital management, ART’s gearing of 37.5% means a debt headroom of c.S$1.8bn, leaving room for it to reach its medium term asset allocation of 25-30% for longer-stay accommodation.

 

Maintain ACCUMULATE, DDM-based TP maintained at S$1.24

No change in our FY22e forecast. The potential reopening of China and Japan to leisure travel are bright sparks. ART remains our top pick in this sector with its geographically diversified portfolio, range of lodging asset classes, stable income base and a strong sponsor.

Ascott Residence Trust – Pick-up in demand upon relaxation

The Positives

 

 

The Negative

 

Outlook

Cap rates have compressed for extended stay assets. We understand that cap rates for US student accommodation assets range between 4.5-5% and have compressed 50-100bps since a year ago. This is more pronounced compared with the 20-30bps cap rate compressions for Japan rental housing, which are trading at c.4% yields. Tightest rates were observed for US multifamily assets, which have been transacting at cap rates of 3-4%. Despite having local team to source for deals, the heightened competition for extended stay assets amid higher interest rates may make it more challenging for ART to make acquisitions in this space.   

 

Electricity cost accounts for 5% of OPEX. Most of ART’s electricity requirements have been hedged through fixed rate contracts, with all assets in Belgium and UK powered by renewable energy, which has lower price volatility compared to brown energy. 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 guest in long-staying guests in SRs. ART is also exploring ways to reduce electricity usage such as installing occupancy detection sensors in rooms that will cut electricity when guest leave the room. It may also consider raising ADRs if necessary.

 

Maintain ACCUMULATE, DDM-based TP raised from S$1.23 to S$1.24

FY22e-26e DPUs raised by 0.3-0.9% as we pencil in acquisition of the Japan portfolio of rental housing and student accommodation assets, resulting in a slight increase in our DDM-TP. Catalysts include faster than anticipated recovery, opportunistic divestments and acquisitions of extended stay assets.

Ascott Residence Trust – Recovery and rebalancing

 

The Positives

 

 

The Negative

 

Ascott Residence Trust – Recovery gaining momentum

 

The Positives

 

The Negative

Outlook

High vaccination rates in ART's eight key markets - France, UK, US, Australia, China, Japan, Singapore and Vietnam. As at end-Oct21, with exception of Vietnam, these countries have fully vaccinated between 68%-84% of its population. While fully vaccinated population in Vietnam is relatively low at 23%, vaccination rates in cities where ART has presence in such as Ho Chin Minh City and Hanoi have reached 60% and 80% respectively. UK, France and US have recovered ahead of the rest of ART’s territories, owing to domestic leisure demand. These countries are also one of the first to reopen leisure travel lanes with selected countries. Following the lifting of lockdown in Brisbane in Sep21, and Melbourne and Sydney and October in Oct21, Australia has lifted its international travel ban for citizens and will be added to Singapore’s VTL on 8 November 2021.

Three properties in Australia and two in Singapore have been block booked by the government until 1Q22. With international travel returning, ART will periodically review whether government business remains relevant or if the asset should be converted to take on leisure demand.

 

Picking up two more PBSAs in the US. Wildwood Lubbock was acquired on 21 September 2021 for S$94.8mn, at an entry yield of 5.1%. Located in Texas, the PBSA serves students attending Texas Tech University. It is fully booked for AY2021 (Sep21 to Aug22). Bed rates have increased 5% from the preceding academic year, AY2020. Acquisition of ART’s fourth PBSA asset, Seven07, is estimated to be completed in mid-November 2021. The S$112.4mn asset is located in Illinois and serves students attending the University of Illinois Urbana-Champaign. Entry yield of 4.5% is expected to increase to 4.8% on the back of 8% YoY growth in bed rates. Seven07 is fully leased for AY2021 and has secured bookings for 50% of beds for AY2022 in just two months after opening AY2022 for booking. Post-acquisition, this segment will account for 11% of AUM, up from 5% as at Dec20, bringing ART closer to its’ 15-20% medium-term target for the extended stay segment. Theses extended stay assets have maintained occupancies above 95% in 2020 and have long average lengths of stay of one year, providing ART with stable income.

 

Maintain ACCUMULATE and DDM-based TP of S$1.19

FY21 recovery has been more laboured that we initially anticipated. As such, we tweak our FY21e-25e DPU estimates between -5.8%-0.3%, with no impact to our DDM-derived TP of S$1.19. We have incorporated a more gradual pace of recovery as well as incorporating the two PBSA acquisitions, Wildwood Lubbock and Seven07.

 

With most of ART’s markets gradually opening up, ART is poised tap the recovery in domestic and international travel demand. Recent acquisitions in the extended stay segment, reopening of voco Times Square South post refurbishment in 4Q21 and opening of Lyf One-North in 4Q21 will aid DPU recovery.

 

ART remains our top pick in the sector owing to its mix of stable and growth revenue, geographical diversification and potentially faster recovery than peers from its exposure to markets with countries with large domestic tourism markets. Current share price implies FY21e/22e DPU yield of 4.1%/5.2%.

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