CapitaLand Ascott Trust – Further upside from occupancy growth
- FY23 DPU of 6.57 cents (+16% YoY) exceeded our expectations by 11.7% due to a one-off realised exchange gain. Excluding one-off items, adjusted DPU increased 14% YoY to 5.44 cents, which was 93% of our forecast.
- 4Q23 portfolio RevPAU rose 4% YoY to S$161, reaching 103% of pre-COVID 4Q19 levels mainly due to higher average daily rates (ADR). Average portfolio occupancy was stable QoQ at 77% (4Q22: 78%), and it was at 92% of pre-COIVD levels.
- Downgrade from BUY to ACCUMULATE with an unchanged DDM-TP of S$1.04 as we roll forward our forecasts. FY24e/FY25e DPU is raised by 3%/6% after lowering our interest costs assumptions. CLAS remains our top pick in the sector owing to its mix of stable and growth income sources and geographical diversification. Growth in RevPAU going forward will come from higher portfolio occupancy, as ADR growth would slow from the high base. The current share price implies an FY24e/25e dividend yield of 6.5/6.8%.
The Positives
- 4Q23 RevPAU grew 4% YoY to S$161, reaching 103% of pre-pandemic 4Q19 pro-forma RevPAU mainly due to higher ADRs. Average portfolio occupancy was stable QoQ at 77% (4Q22: 78%). RevPAU in Australia, Japan, Singapore, UK and USA continued to exceed pre-COVID 4Q19 levels on a same-store basis. Japan saw a spike in RevPAU by 90% YoY after its re-opening to independent leisure travellers in Oct 2022. Performance in China and Vietnam continued to improve, with RevPAU at 86% and 88% of 4Q19 levels respectively.
- Proactive capital management. Gearing and interest cover remained healthy at 37.9% and 4x, respectively. CLAS’s effective borrowing cost remained unchanged at 2.4% QoQ, with 81% of debt on a fixed rate. We expect the FY24 cost of debt to increase to c.2.9% after refinancing 18% of its total debt (c.S$563mn) due in FY24. A 50bps increase in CLAS’s borrowing cost will impact full-year DPU by 0.08 Singapore cents.
- Higher portfolio valuation. CLAS’s portfolio valuation rose 2% as stronger operating performance and outlook mitigated the impact of higher discount and cap rates across all markets (except for Japan). Markets with valuation gains include Australia, Europe, Japan, Singapore, and UK. Separately, CLAS is divesting Citadines Mount Sophia Singapore for S$148mn, 19.4% above book value. The exit yield for this transaction is 3.2%, and CLAS will recognise a net gain of c.S$14.6mn. The divestment is expected to be completed in 1Q24.
The Negatives
CapitaLand Ascott Trust – Occupancy to trend upwards
- 3Q23 gross profit rose 13% YoY to reach 103% of pre-COVID 3Q19 levels.
- 3Q23 portfolio RevPAU rose 17% YoY to S$154, reaching 102% of pre-COVID 3Q19 levels on the continued improvement in portfolio occupancy (77% vs 70% in 3Q22) and average daily rates (ADR). We expect effective borrowing cost to rise from 2.4% in 3Q23 to c.3% for FY24e after refinancing all loans due in FY24.
- Upgrade from ACCUMULATE to BUY due to recent share price performance, DDM-TP lowered from S$1.20 to S$1.04. FY23e/FY24e DPU is lowered by 6%/14% after accounting for the higher share base (+9%) from the equity fund-raising exercise, proposed acquisitions, and higher finance costs. CLAS remains our top pick in the sector owing to its mix of stable and growth income and geographical diversification. Growth in RevPAU going forward will come from higher portfolio occupancy. The current share price implies an FY23e/24e dividend yield of 6.6%.
The Positives
- 3Q23 RevPAU grew 17% YoY to S$154 reaching 102% of pre-pandemic 3Q19 pro-forma RevPAU. Average daily rates (ADRs) remained above pre-COVID levels, while occupancy improved 2ppts QoQ to 77% in 3Q23 (3Q22: 70%). All markets experienced RevPAU growth YoY (see Figure 1), with Singapore, Australia, USA, UK, and Japan performing above pre-COVID levels. Japan saw a spike in RevPAU by 198% YoY after its re-opening to independent leisure travellers in Oct 2022. Performance in China and Vietnam continued to improve, with RevPAU at 80% and 84% of 3Q19 levels respectively. The stabilisation of the newly rebranded The Robertson House, which saw a 30% increase in room rates during early-bird sales, will provide further uplift to revenue from Singapore once renovation works complete in 1Q24.
- Resilience from stable income sources. All 7 French master leases due in 2023 have been renewed in Oct 23 with total projected rents to be c.28% above existing rents under the new structure. Occupancy at the rental housing properties remained stable at >95%. 4Q23 will be the first full quarter contribution for Standard at Columbia, the student accommodation development in South Carolina, USA, which began receiving students from Aug 23 and was >90% occupied upon opening.
- Proactive capital management. CLAS’s effective borrowing cost remained unchanged at 2.4% QoQ. The percentage of loans on fixed rate increased from 80% to 83% QoQ, and interest cover remained healthy at 4.2x. Gearing improved from 38.6% to 35.2% QoQ after proceeds from the EFR in Aug 23 were partially used to pare down loans maturing in FY23 and higher floating rate debt, pending deployment into acquisitions in 4Q23. We expect FY24 cost of debt to increase to c.3% after refinancing 18% of its total debt (c.S$496mn) due in FY24 denominated in EURO, USD and JPY. A 0.6% increase in CLAS’s borrowing cost to 3% will impact full-year DPU by 0.1 Singapore cents.
The Negatives
No financials were provided in this business update.
CapitaLand Ascott Trust – Still room for RevPAU growth
- 1H23 DPU of 2.78 cents (+19% YoY) was in line with expectations and formed 43% of our FY23e forecast, with seasonally stronger performance expected in the second half of the year. Excluding one-off items relating to realised exchange gain from the repayment of foreign currency bank loans and settlement of cross currency interest rate swaps, DPU increased 37% YoY.
- 2Q23 portfolio RevPAU rose 20% YoY to S$149, reaching 98% of pre-COVID 2Q19 levels on the continued improvement in portfolio occupancy (75% vs 70% in 2Q22) and average daily rates (ADR).
- Downgrade from BUY to ACCUMULATE, DDM-TP trimmed from S$1.26 to S$1.20. FY23e/FY24e DPU is lowered by 4%/6% on higher interest assumptions. CLAS remains our top pick in the sector owing to its mix of stable and growth income and geographical diversification. The current share price implies an FY23e dividend yield of 5.7%.
The Positives
- 2Q23 RevPAU grew 20% YoY to S$149 and is at 98% of pre-pandemic 2Q19 pro-forma RevPAU. YoY improvement was driven by both higher average daily rates (ADRs), which is up c.12% YoY in 2Q23, and higher occupancy of 75% in 2Q23 (2Q22: 70%). All markets experienced RevPAU growth YoY (see Figure 1), with Singapore, Australia, USA, UK, and Japan performing above pre-COVID levels. Japan saw a spike in RevPAU by 247% YoY after its re-opening to independent leisure travellers in Oct 2022. Performance in China and Vietnam strengthened and are currently at 78% and 83% of 2Q19 levels respectively.
- Portfolio reconstitution strategy. During the quarter, CLAS entered into conditional sale and purchase agreements to divest 4 properties in France for €44.4mn (S$63.4mn) to a third party. The price is at a 63% premium to book value and an exit yield of c.4%, unlocking a net gain of €0.2mn (cS$0.3mn). The expected completion of this divestment is in 4Q23. Standard at Columbia, the student accommodation development in South Carolina, USA, has obtained its temporary certificate of occupancy and is ready to receive students for the academic year 2023-24. It has a pre-committed occupancy of 87%. CLAS also has five properties that are currently undergoing AEIs to enhance return, as well as the redevelopment of Somerset Liang Court which is expected to complete in 2H25.
- Effective capital management. Including capitalised interest, CLAS’s effective borrowing cost remained unchanged at 2.4% QoQ. The percentage of loans on fixed rate increased from 75% to 80% as CLAS entered into more interest rate swaps during the quarter. Gearing improved marginally from 38.7% to 38.6% QoQ, leaving c.S$1.8bn of debt headroom for CLAS to reach its medium-term asset allocation of 25-30% for longer-stay accommodation (currently at c.19%). We expect cost of debt to increase marginally as CLAS refinances 13% of its total debt (c.S$372mn) due at the end of 2023 denominated in JPY, AUD and EURO. A 10bps increase in benchmark rates will impact full-year DPU by 0.02 Singapore cents.
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
- No financials were provided in this business update. 1Q23 gross profit was 59% higher YoY, and 97% of 1Q19 pre-COVID-19 levels. Portfolio RevPAU spiked 90% YoY to S$127 and is at 93% of pre-pandemic 1Q19 pro forma RevPAU.
- 1Q23 effective borrowing cost at 2.4% (4Q22: 1.8%) is still lower than many of its peers.
- Maintain BUY, DDM-TP unchanged at S$1.26. CLAS remains our top pick in the sector owing to its mix of stable and growth income and geographical diversification. The current share price implies a FY23e dividend yield of 6%.
The Positives
- 1Q23 RevPAU grew 90% YoY to S$127 (1Q22: S$67, 4Q22: S$155) and is at 93% of pre-pandemic 1Q19 pro forma RevPAU. YoY improvement was driven by both higher average daily rates (ADRs), which is up c.35% YoY in 1Q23, and higher occupancy of c.70% in 1Q23 (1Q22: 50%, 4Q22:78%). All markets experienced strong RevPAU growth YoY (see Figure 1), with Singapore, Australia, USA, and Japan RevPAU at or above pre-COVID-19 levels. Japan saw a spike in RevPAU by 351% YoY after its re-opening to independent leisure travellers in Oct 2022, with Tokyo properties registering ADRs that surpassed 1Q19 levels. Growth drivers for RevPAU going forward are in China and Vietnam which are currently at 68% and 81% of 1Q19 levels, respectively.
- Extended stay segment remains resilient, comprising c.19% of 1Q23 gross profit. Occupancy of the longer stay properties remained stable at >95%. Student accommodation continues to be resilient with 98% leased for the academic year 2022-2023 (vs 95% last academic year), with rent growth of c.6% YoY. Longer-stay accommodation offers income stability while hospitality assets capture growth from travel recovery.
The Negative
- Higher interest expense. Including capitalised interest, CLAS’s effective borrowing cost increased from 1.8% to 2.4% QoQ, and the percentage of loans on fixed rate decreased from c.78% to c.75%. Gearing increased marginally from 38% to 38.7% QoQ, leaving c.S$1.7bn of debt headroom for CLAS to reach its medium-term asset allocation of 25-30% for longer-stay accommodation (currently at c.19%). Cost of debt is expected to increase further when CLAS refinances 14% of total debt, or about S$400mn, which is due at the end of 2023. A 50bps increase in benchmark rates will impact full-year DPU by 0.1 cents.
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
- FY22 DPU of 5.67 cents (+31%) was in line with our forecast, supported by new acquisitions and the recovery of travel.
- 4Q22 portfolio RevPAU rose 78% YoY to S$155, reaching pre-pandemic 4Q19 levels on continued improvement in portfolio occupancy (78% vs 60% in 4Q21) and average daily rates (ADR).
- Maintain BUY, DDM-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 owing to its mix of stable and growth income and geographical diversification. The current share price implies a FY23e dividend yield of 5.9%.
The Positives
- 4Q22 RevPAU grew 78%/17% YoY/ QoQ to S$155, reaching pre-pandemic 4Q19 pro forma RevPAU. YoY improvement was driven by both higher average daily rates (ADRs), which is up c.37% YoY in 4Q22, and higher occupancy of 78% in 4Q22 (4Q21: 60%). All markets experienced strong RevPAU growth YoY (see Figure 1), with Singapore, Australia, US and UK RevPAU at or above pre-COVID-19 levels. Management guided that the growth drivers for RevPAU in 2023 were in China, Japan, and Vietnam which are currently at 80%, 73% and 78% of 4Q19 levels, respectively.
- Portfolio valuation remained stable. CLAS reported a gross fair value gain of c.S$200mn despite higher capitalisation and discount rates used across all markets (with the exception of Japan), due to the stronger operating performance and improving outlook of the portfolio. Across most markets, capitalisation rates increased by 25-50bps. Markets with valuation gains included those with RevPAU above normalised levels such as Singapore, Australia, USA and UK (3 – 7% YoY increase).
- Prudent capital management, with c.78% of debt on fixed rate, locked in for a weighted average of c.4 years. CLAS’ cost of borrowing remained low for the quarter at 1.8%, with an interest cover of 4.4x. Gearing of 38% means a debt headroom of c.S$1.8bn, leaving room for CLAS to reach its medium-term asset allocation of 25-30% for longer-stay accommodation (currently at 19%). Only 14% of total debt, or about S$400mn, is due for refinancing in 2023. CLAS expects average borrowing costs for the full year 2023 to be around 2.05%. A 50bps increase in benchmark rates will impact full-year DPU by 0.1 cents.
The Negative
- Foreign exchange headwinds continue to impact DPU. The impact of foreign exchange after hedges in place on gross profit was 2.8% for FY22. CLAS adopts a natural hedge wherever possible by borrowing in the currency of the underlying assets. A 5% depreciation in foreign currency implies a c.3% impact to DPU.
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
- No financials provided in this business update. 3Q22 gross profit is at c.90% of pre-COVID-19 levels. Portfolio RevPAU jumped 88% YoY to S$132 due to higher average daily rate and occupancy (>70%), and is c.87% of 3Q19 pro forma RevPAU.
- 76% of debts at fixed rate. Every 50bps rise in interest rates would impact DPU by c.2%.
- Upgrade to BUY, DDM-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 as we pencil in the acquisition of S$318.3mn in assets. 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.
The Positives
- 3Q22 RevPAU grew 88%/6% YoY/ QoQ, currently at 87% of pre-pandemic levels. YoY improvement was driven by both higher average daily rates (ADRs), which is up c.50% YoY in 3Q22, and higher occupancy of >70% in 3Q22 (3Q21: 55%). All markets experienced strong RevPAU growth YoY except for China and Japan (see Figure 1), 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 YoY 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.
- Extended stay segment remains resilient, comprising c.15% of 3Q22 gross profit. 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 c.6% 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 CLAS 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.
- High proportion of debts at fixed rate, c.76%, locked in for a weighted average of c.3.5 years. CLAS 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 c.2% impact on DPU.
The Negative
- The Strong Singapore Dollar continues to impact DPU. The impact of foreign exchange after hedges in place on gross profit was 2.1% for 9M22. CLAS adopts a natural hedge wherever possible by borrowing in the currency of the underlying assets. A 5% depreciation in foreign currency implies a c.3% impact to DPU.
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
- Recovery is underway as reflected in the 2Q22 results. Portfolio RevPAU of S$124 is c.82% of pre-Covid levels, up 91% YoY on the back of higher average daily rate and occupancy.
- Extended stay segment has been resilient with 95% occupancy and 8% expected rental growth for US student accommodations.
- Private placement to raise S$170million at S$1.120 to partially fund a proposed acquisition of serviced residence properties in France, Vietnam and Australia, rental housing properties in Japan and a student accommodation property in South Carolina, US for an aggregate purchase consideration of c.S$215.2million. Transaction is expected to be DPU accretive by 2.8%.
- Maintain ACCUMULATE, DDM-TP maintained at S$1.24. No change in our FY22e forecast. Catalysts include reopening of China and Japan to leisure travel, opportunistic divestments, and acquisitions of extended stay assets to raise the proportion of stable income sources to cushion the impact from recessionary concerns, rising inflation and macroeconomic uncertainties.
Investment thesis
- 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.
- 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.
- 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
- No financials provided in this business update. 1Q22 RevPAU grew 22% YoY, currently at 65% of pre-pandemic levels, on the back of higher ADRs and occupancy.
- RevPAU declined 23% QoQ due to tightening of restrictions in Jan-Feb22 in several of ART's key markets due to resurgence of Omicron cases, seasonal lull, as well as three properties transitioning out of government block bookings.
- Maintain ACCUMULATE, DDM-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 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.
The Positives
- 1Q22 RevPAU grew 22%/-23% YoY/QoQ, currently at 65% of pre-pandemic levels. YoY improvement largely driven by higher average daily rates (ADRs) while portfolio 1Q22 occupancy came in at c.50%, comparable with 1Q21 levels, as several properties exiting government contracts obscured occupancy improvements. All key markets except Singapore were affected by tightening of restrictions in Jan-Feb22 due to the elevated Omicron cases. RevPAU declined 23% QoQ due to tightening of restrictions in Jan-Feb22, the seasonal lull in the first quarter, as well as three properties transitioning out of government block bookings. Demand picked up post-easing of measures. ART noted increasing demand from international travellers in France, UK and US, with international travellers accounting for 40% of business at UK properties in 1Q22. Corporate demand is also returning for Australia, France and Singapore.
- Extended stay segment accelerating earnings recovery, contributing c.28% of 1Q22 gross profit, up from c.12% in 1Q21. After including the Mar22 acquisition announcement of four rental housing and one student accommodation asset in Japan for S$125m, investments in this segment totalled S$905mn since 2021. Occupancy at Japan rental housing assets and the student accommodation assets were above 95% and 100% respectively in 1Q21. Pre-leasing at the US student accommodations for the next academic year exceeded last year’s pre-leasing, with rental growth expected to come in at 5% YoY.
The Negative
- Properties transitioning out of block booking will require some time for operations to pick up. As COVID caseloads stabilise and countries reopen international borders, respective governments have reduced their inventory of hotels held for isolation purposes. Three properties - two in Singapore and one in Australia - transited from block bookings to welcoming public guests. Up to one month of down time is expected as the properties undergo deep cleaning. Occupancy is expected to gradually improve as ART restarts marketing initiatives for these properties.
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
- FY21 DPU of 4.32 Scts (+17%) was in line, forming 99% of our forecast, supported by new acquisitions and recovery of existing portfolio.
- AUM in extended-stay segment increased from 5% to 16% following S$785mn in acquisitions in FY21. Medium-term target raised to 25-30% of AUM.
- Maintain ACCUMULATE, DDM-TP raised from S$1.19to S$1.22. FY22e-25e DPUs have been lowered by 9-11.5% as we push back recovery from FY23 to FY24. Despite a slight increase in cost of equity from 8.10% to 8.14%, our DDM-based TP rises from S$1.19 to S$1.23 as we roll forward our forecast. ART remains our top pick in the sector owing to its mix of stable and growth revenue and geographical diversification. Current share price implies FY22e/23e DPU yield of 5.0%/5.7%.
The Positives
- Sixth quarter of RevPAU recovery; FY21 gross profit up 15.8% YoY (Figure 1 and 2). 4Q21 RevPAU grew 24%/74% QoQ/YoY) on the back of higher occupancy and ADRs. Average portfolio occupancy improved QoQ from c.55% to c.60%. Demand from both corporate and leisure segments returned as travel restrictions were eased and economic activities picked up. Amongst ART’s key markets, US (-275.7%), UK (92.3%) and Australia (+54.2%) registered the strongest YoY gross profit growth. US reversed its S$7mn gross loss in FY20 and recorded FY21 gross profit of S$12mn, of which c.S$7mn or 57% was attributed to the acquisition of five student accommodation assets in FY21. The impact of reopening of borders and relaxation of domestic mobility was reflected in the 48% growth in gross profit from a management contract. Revenue and gross profit from master leases and MCMGI were stable, down 2-5% due to closure of two WBF properties in Japan, reclassification of Park Hotel Clarke Quay from master lease to management contract in 2H21, divestment of two properties in France and change in rent structure of French master leases, partially offset by the absence of rent abatement in FY21.
- Portfolio reconstitution into long-stay assets to shore up stable revenues. ART divested S$580mn in assets at exit yields of c.2% in FY20/21. In FY21, it invested S$785mn into the long-stay segment at higher EBITDA yields of c.5%. Long-stay assets acquisitions announced in FY21 included eight US student accommodation assets and three Japan rental housing assets. Apart from replacing divested income, these long-stay assets provide income visibility, providing a stable base of earning for ART.
The Negative
- Fragile recovery. Throughout the year, operations affected by the tightening and easing of restrictions. Restrictions were imposed and travel bubbles were delayed in various countries due to the emergence of the Delta and Omicron variants, resulting in softer demand in certain months. Demand for travel was evident from the uptick in bookings during periods when restrictions were eased. While more governments are adopting an endemic stance, knee-jerk effects from new, severe variants could still trigger the imposition of restrictions.
Ascott Residence Trust – Recovery gaining momentum
- No financial data provided in this operational update. To recap, 1H21 DPU (+95% YoY) of 2.05 cents was in line at 47% of our estimate.
- Gradual recovery evident from rising RevPAU, driven by higher ADRs in 3Q21.
- S$491mn invested in extended stay assets year-to-November will replaced ART’s divested income, hastening DPU recovery. High vaccination rates in key markets and governments’ commitment to reopening of international borders should support further recovery.
- Maintain ACCUMULATE and DDM-based (COE 8.5%) 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.
The Positives
- Fifth quarter of RevPAU recovery (Figure 1 and 2). 3Q21 RevPAU grew 8% QoQ and 49% YoY, driven by higher ADRs. Portfolio occupancy was unchanged QoQ at c.55%. Stronger QoQ RevPAU recovery in 3Q21 from Japan (+108%), France (3Q21 occupancy: 80%), UK (+45%) and US (+50%). Two SRs in Tokyo secured group booking during the Tokyo Olympics. France and UK benefitted from domestic and European leisure demand during the summer holidays. US saw strong domestic leisure demand, particularly on weekends, as well as an uptick of corporate group booking and transient travellers as the US economy reopened. China also registered a slight 3% QoQ growth in RevPAU on a same-store basis due to returning corporate long stay demand.
- Acquisitions to rebalance portfolio and replace divested income. ART has invested S$491mn year-to-November at average EBITDA yield of 5%, replacing S$13mn in lost distributable income due to divestments. YTD, ART has picked up three rental housing assets and four purpose build student accommodation (PBSA) assets in the US, one of which is still under development. Apart from replacing divested income, these long stay assets provide income visibility, providing a stable base of earning for ART.
The Negative
- Vietnam and Australia’s performance marred by lockdowns in 3Q21. Australia’s RevPAU fell 28% QoQ due to lockdowns and interstate travel restrictions - New South Wales and Victoria were in lockdown for the most part of 3Q21. Thankfully, three out of 14 of ART’s Australian properties were block booked by the government for isolation business. Similarly in Vietnam, lockdown measures in Ho Chin Minh City and Hanoi resulted in a 19% QoQ decline in RevPAU. Both Australia and Vietnam have begun easing restrictions since late September.
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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