Ascott Residence Trust - DBS Research 2022-08-05: Strongest Recovery Since Pandemic; RevPAU Almost Doubled Y-o-y

• Ascott Residence Trust (SGX:HMN) reported a 1H22 revenue of S$267.4m (+45% y-o-y). Higher revenue was due to acquisition contributions primarily within the longer-stay lodging segment, as well as the Lyf One-North which launched in Jan’22. Apart from inorganic growth, RevPAU rose 60% y-o-y in 1H22 to S$96.
• The recovery is tilted towards 2Q22, where RevPAU almost doubled y-o-y (+91% y-o-y) to S$120 and was Ascott Residence Trust’s strongest recovery quarter since the pandemic.
• Gross profit (GP) rose 44% y-o-y to S$118.2 for the half year. 1H22 DPU rose 14% y-o-y to S$0.0233, or 120% y-o-y to S$0.0178, excluding one-off items such as distribution top up (amounting to S$20m in 1H21).
• Income sources continued to be well-diversified, with stable income sources – comprised of master lease and management contract with a minimum guaranteed income (MCMGI) and longer-stay assets – contributed to 68% of 1H22 gross profits.
• Utilities hike temporarily hedged on fixed rates in three markets, while utility expenses are passed on to tenants in long stay lodging assets. Staff costs higher at ~10% above 2019 levels.

Robust financial metrics.

• Ascott Residence Trust remains well-equipped on the capital management front with stable gearing of 37.5%, a debt headroom of S$1.8bn (to target gearing of 50%).
• Average cost of debt stood at 1.7% with a weighted average debt expiry of 3.1 years (WADE of 4.6 years for floating loans) and ~80% of debt on fixed rates.

RevPAR recovery led by all global markets except Japan and China

• Income from master leases (37% of gross profit) declined 8% y-o-y (or +7% y-o-y on a same store basis) due to reclassification of Park Hotel Clarke Quay. Management contract with a minimum guaranteed income (MCMGI) (10% of gross profit) rose 172% y-o-y alongside RevPAR recovery, while management contracts (53% of gross profit, including classification of long-stay segment) rose 57% y-o-y with higher gross profits across all countries except China.
• RevPAR to continue to sustain recovery to close the gap against pre-COVID, portfolio RevPAU stands at ~82% of normalised levels in 2Q22, or ~84% for the month of June.
• Markets to lead recovery with further relaxation potential will be China and Japan. Japan's hotel RevPAU is still at ~32% of normalised basis with a long headroom to run.
• Markets that have done well to see RevPAU matching pre-COVID levels include France and the UK. The US is also seeing a sharp increase in occupancies back to 80% levels for their New York hotels from strong corporate demand.

Acquisition appetite remains strong for longer-stay lodging assets with continued interest in US PBSAs.

• Interest for acquisitions continues to be in longer-stay asset class, current exposure at 17% with medium term target exposure of 25-30%. US PBSAs continue to rank high on ART's acquisition radar with relatively attractive yield spread and stable operating metrices.
• Longer-stay segment continue to deliver both stability and rental growth. Occupancy for Ascott Residence Trust’s longer-stay assets has been maintained at above 95%, with PBSA (purpose-built student accommodation) segment expected to deliver 8% y-o-y rental growth in the coming academic year.

Maintain BUY recommendation on Ascott Residence Trust; upside from capital distributions and accretive acquisitions

• We have assumed some form of capital distributions for full year at S$10m. Ascott Residence Trust distributed S$45m in capital top-ups in the last financial year and still has ~S$300m in capital gain reserves from their divestments since 2018.
• Quantum of capital distributions at year end will likely account for both acquisition funding needs and full year portfolio and DPU performance.
• Accretive acquisitions will come as further upside to our full year FY22 estimates, which we have not modelled into forecast numbers. Ascott Residence Trust executed on ~S$850m in acquisitions within the longer-stay lodging asset class in 2021. We continue to expect delivery of acquisitions within this space in 2H22, which will serve as upside to our numbers.
• Ascott Residence Trust's share price is currently trading at a FY22F / FY23F forward yield of 4.9% / 5.7%, we estimate a 12% CAGR in DPU between FY22-FY24.