Ascott Residence Trust – Recovery dragged out May 6, 2021 710

PSR Recommendation: ACCUMULATE Status: Downgraded
Target Price: 1.170
  • No financials in this operational update. RevPAU recovered by 10% QoQ (-47% YoY) despite re-introduction and extension of lockdowns in some countries. 1Q21 portfolio occupancy increased from 45% in 4Q20 to 50%, lifted by block bookings.
  • Divested Somerset Xu Hui Shanghai at 171% premium to book. Acquired rental-housing asset in Sapporo at 4% EBITDA yield.
  • DDM-based (COE 8.5%) TP unchanged at S$1.17. We lower FY21e/22e DPUs by 0.9%/3.6% reflect divestment of Somerset Xu Hui and acquisition of Sapporo asset, partially offset by S$20mn of capital distribution assumed for FY21e (FY20: S$45mn). Recovery timeline may be more protracted in the face of virus mutations and new waves. Downgrade to ACCUMULATE from BUY.


The Positives

  • Portfolio RevPAU increased 10% QoQ. RevPAU improved in 1Q even though it was a seasonal lull for the hospitality sector and COVID-19’s resurgence triggered fresh lockdowns. Countries affected included Australia, China, France and the UK. Portfolio occupancy increased from 45% in 4Q20 to 50%, supported by block bookings in Australia, Singapore and the UK. RevPAU in these three markets grew 46%, 14% and 16% QoQ. RevPAU in China (-9%), Japan (-15%), the UK (-50%) and Vietnam (-4%) were affected by lockdowns. Five out of ART’s 17 French properties remained closed due to muted demand and lockdowns. However, these assets continued to pay fixed rents under master-lease agreements.
  • Stable-income properties anchored earnings. ART’s master leases, management contracts with minimum guaranteed income and longer-stay properties such as rental housing and student accommodation contributed over three-quarters to its 1Q21 gross profit. Countries with long stays, such as Indonesia, the Philippines and Vietnam, were more resilient with smaller YoY RevPAU declines.
  • Portfolio reconstitution on track. During the quarter, ART divested Somerset Xu Hui Shanghai at a 171% premium to book value of S$79.2mn. It realised S$135.4mn of gains. The divestment will be completed in 3Q21. Delivering on its strategy to increase “stable” revenue, ART also acquired a 127-unit rental-housing property in Sapporo, Japan, for S$25.5mn. The asset was opened in March 2020 and is within walking distance to ART’s first rental-housing asset in Sapporo. Slated for completion in 2Q21, the property is pro-forma DPU-accretive with an EBITDA yield of 4%. After ART’s Shanghai divestment, gearing is expected to fall from 36.1% to c.35%.


The Negatives

  • Arrears from Park Hotel Clarke Quay. Park Hotel was block-booked by the Singapore government from April to December 2020. It has been re-booked by the government for May-June 2021. Despite operational cashflow, the master leasee has not fulfilled its rent obligations. ART has issued a letter of demand to recover S$5.4mn in accrued rents. In addition, S$3.5mn in rents under the Statutory Repayment Schedule was outstanding as at 31 March 2021. ART has S$6.8mn in security deposits, equivalent to six months of rent, for Park Hotel. Negotiations for the recovery of the arrears are underway and ART is optimistic of a resolution. The master lease will expire in 2023. ART’s options for this property include lease extension, repositioning the hotel or divestment. The asset is well-located in Clarke Quay and is expected to benefit from the reopening of international borders as well as a redeveloped Liang Court in 2025.
  • 10% of rebates to struggling tenants. ART continued to support tenants that were operationally challenged and will calibrate its support as they recover.


Shorter income visibility due to shorter forward bookings

Corporate bookings and domestic leisure demand have picked up. ART has received 3Q/4Q bookings from some corporate guests who intend to stay longer. However, as the pandemic remains in a state of flux, leisure guests are booking less than one month in advance.


Acquisitions likely in extended-stay asset class

The extended-stay segment comprises rental housing and purpose-built student accommodation whose average length of stay is about a year. These assets’ occupancy can reach a high 95% throughout the year, providing stable income for ART. Currently at 7% of its AUM, ART intends to increase the figure to 10-15%.


Downgrade to ACCUMULATE, unchanged DDM-based TP of S$1.17

We lower FY21e/22e DPUs by 0.9%/3.6% to reflect its divestment of Somerset Xu Hui and acquisition of the Sapporo asset, partially offset by S$20mn of capital distribution assumed for FY21e (FY20: S$45mn). The recovery timeline may be more protracted in the face of virus mutations and new waves of the virus.

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