CapitaLand Ascott Trust - UOB Kay Hian 2022-11-02: 3Q22 Ideal Mix Of Recovery Potential & Resilient Balance Sheet

• CapitaLand Ascott Trust’ portfolio RevPAU recovered 88% y-o-y and 6% q-o-q to S$132 in 3Q22, which is 87% of pre-pandemic levels on a pro forma basis, due to higher occupancy (>70% in 3Q22) and ADR (9M22: +40% y-o-y).
• China and Singapore recorded strong sequential growth, while Australia and the US continued to perform at close to pre-pandemic levels.
• CapitaLand Ascott Trust's aggregate leverage was healthy at 35.8%, while cost of debt was stable at 1.7%. 2023 distribution yield is attractive at 6.5%. Maintain BUY.

CapitaLand Ascott Trust (CLAS)'s 3Q22 results

• CapitaLand Ascott Trust (SGX:HMN) reported its 3Q22 business update. See CapitaLand Ascott Trust's announcement dated 28 Oct 2022.
• Gross profit grew 70% y-o-y on same-store basis. Growth in revenue and gross profit was driven by contributions from eight new properties and stronger operating performance of the existing portfolio. Gross profit accounted for 90% of pre-pandemic levels on a pro forma basis. Excluding the contributions from the eight properties, same-store gross profit grew 70% y-o-y in 3Q22.

Recovery momentum sustained into 3Q22.

• CapitaLand Ascott Trust's portfolio RevPAU recovered 88% y-o-y and 6% q-o-q to S$132 in 3Q22, which is 87% of pre-pandemic levels on a pro forma basis, due to higher occupancy (>70%) and average daily rates (ADR) (9M22: +40% y-o-y). China and Singapore recorded strong growth of 28% and 27% q-o-q respectively. Australia and the US continued to perform at close to pre-pandemic levels.
• China: Recovery led by pick-up in domestic corporate travel. RevPAU rebounded 28% q-o-q but was flat y-o-y at RMB278 in 3Q22. Occupancy recovered from 50% in 2Q22 to 70% in 3Q22 driven by corporate long stays and project groups. The average length of stay was 6.5 months. Domestic corporate transient demand picked up after the quarantine duration was shortened by half to seven days in Jun 22.
• Singapore: Tourists back for F1 Singapore Grand Prix and MICE events. RevPAU for Citadines Mount Sophia (CMS) grew 174% y-o-y and 28% q-o-q to S$178 in 3Q22. CMS’ ADR is 30% above pre-pandemic levels, while occupancy was above 90%. lyf one-north achieved occupancy of above 90% supported by long-stay bookings from companies and educational institutions located nearby. The two properties are expected to benefit from higher ADR in 4Q22 due to the year-end holiday season.
• Australia: Growth momentum sustained by domestic leisure travel. RevPAU increased 126% y-o-y to A$129 in 3Q22, which is 96% of pre-pandemic levels, driven by higher ADR. The recovery was driven by domestic leisure travel with uplift from large-scale sporting and entertainment events. Its six hotels saw strong pick-up in 3Q22. Outlook is positive as travel confidence was restored.
• US: Domestic leisure demand drives higher occupancy. RevPAU recovered 140% y-o-y to US$209 in 3Q22, which is in line with pre-pandemic levels. Its three hotels achieved occupancy of 90% and ADR has exceeded pre-pandemic levels. Outlook is positive with New York City expected to host more events in 4Q22.
• Japan: Bright prospects for strong recovery but offset by weakness in JPY. RevPAU recovered 8% q-o-q to ¥4,633 in 3Q22, which is only 39% of pre-pandemic levels. Japan lifted border restrictions on 11 Oct 22, restored visa-free travel and removed the cap on daily arrivals. The government has introduced the National Travel Discount to boost domestic tourism. Japan will benefit from pent-up demand, while the weak Japanese yen makes Japan an affordable and attractive destination. CapitaLand Ascott Trust owns 23 properties in Japan, which accounted for 18% of total assets.
• Positive contributions from newly-acquired student accommodation properties. Longer-stay properties registered occupancy of 95% and contributed 15% of gross profit in 3Q22. Student accommodation is 99% leased for the academic year 2022-23 (AY 2021- 22: > 95%) with rent growth of 6% y-o-y.

Resilient balance sheet.

• CapitaLand Ascott Trust's aggregate leverage eased 1.7ppt q-o-q to 35.8% in 3Q22. Aggregate leverage would rise to 38.5% after completing the acquisition of nine properties from its sponsor The Ascott Limited in 4Q22.
• Cost of debt was stable at 1.7%. 76% of its borrowings are on fixed rates. The average term to maturity was 3.5 years.
• Management estimated that every 50bp change in benchmark rates is estimated to reduce DPU by 0.1 cents per year.

Raising room rates with sustained pent-up demand.

• We expect continued recovery due to pent-up demand for travel and more countries reopening their international borders. 4Q22 is seasonally softer for corporate travel but forward booking for leisure travel remains robust.
• CapitaLand Ascott Trust is able to generate profitable growth by raising room rates to cover rising utilities and labour costs. It will benefit from full-year contributions of student accommodation acquired last year.

Setting sights on a higher goal.

• Management has raised the asset allocation target for longer-stay assets by 10ppt from 15-20% to 25-30% in the medium term.

CapitaLand Ascott Trust – Earnings forecast revision & recommendation

• We maintain our existing DPU forecast. Maintain BUY on CapitaLand Ascott Trust.
• Our target price of S$1.27 is based on DDM (cost of equity: 7.5%, terminal growth: 2.6%).
• Catalyst:
  • Yield-accretive acquisitions for student accommodation and rental housing.
  • Full-year contributions from maiden development project lyf one-north in 2022.
  • Recovery of the hospitality industry in Europe, the US, Japan and Singapore, followed by ies in the Asia Pacific region.