Ascott Residence Trust – Pick-up in demand upon relaxation May 4, 2022 244

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: SGD0.975 Target Price: SGD1.24
  • 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.

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