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.
