• 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

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.

2. 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. 

3. 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.