Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


Ascott Residence Trust - Pointing to a Better Future!

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  • An improved quarter with key markets showing operational resilience.
  • Under-geared balance sheet at 33%; significant headroom to grow inorganically.
  • Potential to re-tap or refinance its 5.0% perpetual securities could bring about savings.
  • Aiming to complete the merger with Ascendas Hospitality Trust by end-2019, subject to unitholders’ approval.

What’s New

An improved quarter; a strong 1H19 sets the tone for a better 2H19.

  • ASCOTT RESIDENCE TRUST (SGX:A68U) reported an 8% rise in both 2Q19 distribution income and dividend of S$43.1m (or DPU of 1.98 Scts). The boost came mainly from a S$3.1m gain from repayment of foreign currency bank loans post the divestment proceeds from Ascott Raffles Place Singapore.
  • On a half-year basis, Ascott Residence Trust reported a DPU of 3.43 Scts (+8.0%), 47% of our full-year estimates and in line with expectations.
  • Excluding the one-offs (gains on debt repayment), Ascott Residence Trust’s 2Q19 DPU would have come in flat y-o-y at 1.84 Scts and 1H19 DPU at 3.17 Scts (+2.0%). This was mainly driven by higher revenues and gross profits which increased by 2.0% and 7.0% to S$132.5m and S$67.7m respectively.
  • The better figures mainly came from the contribution from Citadines Connect Sydney Airport (completed in May 2019) and higher revenue from its existing properties in the Philippines, UK and Japan. This more than offset the income loss from the divestment of Ascott Raffles Place Singapore.

Steady operating metrics as its key markets reported stronger results.

  • Singapore operations stabilising. In local currency terms, its properties (three properties post sale of Ascott Raffles Place) in Singapore (c.10% of 2Q19 gross profits) saw an 11% drop in revenues y-o-y due to the sale of Ascott Raffles Place Singapore. For the properties under management contract (Somerset Liang Court and Citadines Mount Sophia), gross profit came in flat y-o-y on the back of a 2% rise in revenues, driven by a c.2% rise in RevPAU to S$194/night. This is a positive development after quarters of being under pressure due to lower supply.
  • Australia – Focus on optimising operations amidst supply pressures. Contributing to 6% of gross profits, the properties under management contract saw a 10% rise in revenues, driven from the acquisition of Citadines Connect Sydney Airport. Due to the hotel having a lower average daily rate (ADR), RevPAU dipped 10% y-o-y to A$120/night. On a same-store basis, RevPAU would have declined by a lower 4% instead. While the manager anticipates near-term disruptions from the hike in supply rooms, especially in Melbourne in the next few years, longer-term drivers for travel remain attractive. The immediate upside in the coming quarters will come mainly from the rebranding and building-up of the corporate base of Citadines Connect Sydney Airport hotel.
  • China – Tier 1 assets continue to churn resilient returns. At 9% of gross profits, Ascott Residence Trust’s China properties saw a 4% dip in RevPAU to RMB455/night. While revenues remain under pressure at -2% y-o-y, we note the manager’s efforts to contain cost, marketing which enabled the properties to deliver a 13% rise in gross profits. While near-term travel sentiment could be impacted due to the ongoing macro slowdown, the manager retains a cost-efficient strategy to drive positive returns.
  • Japan – Leisure demand remains strong. In the build-up to the 2020 Olympics and the 2019 Rugby World cup, Ascott Residence Trust’s Japan properties continue to see strong demand, especially in the leisure segment. In 2Q19, Japan (c.12% of gross profit) reported a 5% rise in revenues on the back of a 8% rise in RevPAU to JPY13,238/night. The longer-term demand dynamics remain positive and we believe its properties will continue to deliver strong operational performance in the coming years.
  • Vietnam – Positive returns as market dynamics remain positive. Ascott Residence Trust’s five properties in Vietnam (8% of gross profits) reported robust operational numbers, driven by a 4% rise in RevPAU to VND1,583/night. As a result of the manager keeping a lid on staffing costs, gross profits rose by a higher 7% compared to a 5% rise in revenues. The outlook picture remains competitive due to the rise of new supply and growth of condotels.
  • United Kingdom – Strong demand from corporates and leisure but longer-term Brexit uncertainty lingers. At c.10% of gross profits, the UK is one of the key markets for Ascott Residence Trust as its properties continue to report positive operational metrics – with RevPAU up 11% to GBP144/night, driving gross profits by a higher 12%. The strong performance was driven by robust leisure and corporate demand boosted by events like the RHS Chelsea Flower Show, Royal Ascot and ICC Cricket World Cup. Looking ahead, the uncertainty from Brexit remains an overhang for its corporate businesses. However, we take comfort that the properties are located within London, which we believe should remain resilient over market cycles. Downside is also limited as the properties operate under a management contract with minimum guarantee income.
  • United States – New York remains the place to be. At 20% of gross profit, the three US hotels continue to deliver steady returns, but RevPAU declined by a slight 1.8% y-o-y to S$240/night. Excluding the accounting effects of FRS 116, gross profits would have declined by c.3% (vs the 46% rise reported).

Under-geared balance sheet; looking forward to deploying capacity into use.

  • Ascott Residence Trust’s gearing of 32.8% is at one of its lowest levels in recent years (vs an optimal range of c.37-39%). We believe that the manager will be looking to deploy its headroom to use as it scouts globally for deals. Cities like the UK, Japan and Korea offer interesting opportunities to add/increase its exposure which we believe will be value-accretive to unitholders.
  • Interest costs remain stable at 2.1% per annum with 88% secured into fixed rates, mitigating the impact of interest rate volatility on distributions.
  • Ascott Residence Trust has also a fairly long weighted debt expiry of 3.9 years (vs 3.6 years a quarter ago) with no major refinancing in the medium term.
  • We note that the first reset date for Ascott Residence Trust’s 5.0% perpetual security is in October 2019 with Ascott Residence Trust (being the issuer) having the right to redeem in whole on that date. Given the low interest rate and ample liquidity environment, the manager might look to refinance this through a re-tap of the perpetual market or with new debt facilities.

Proposed merger with Ascendas Hospitality Trust to be completed by end-2019.

  • The EGM planned for the proposed with Ascendas Hospitality Trust (SGX:Q1P) is projected to complete around October 2019 with the expected completion date by the end of the year.
  • We look forward to the conclusion of this merger as the benefits of an enlarged combined entity will, in our view, drive liquidity and investor interest in the stock in the longer term. In addition, the potential inclusion in a major property index (EPRA NAREIT Developed Asia Index) is also a mouth-watering prospect in the medium term.
  • Our BUY call and Target Price of S$1.45 are maintained.

Source: DBS Research - 31 Jul 2019

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