• SRs performed better than hotels
• <20% exposure per country
• Lower FV estimate of S$1.11

COVID-19 Spread Across the Globe

COVID-19 is spreading rapidly across the globe. It now seems to be spreading much more rapidly outside China than within. As of 13 Mar, COVID-19 has spread to over 120 countries with more than 140,000 reported cases. Apart from China, the three countries with the highest number of confirmed cases are: Korea (8,086 cases), Italy (17,660 cases) and Iran (11,364 cases). At a media briefing last week, WHO declared COVID-19 a global pandemic as the coronavirus continued to spread rapidly worldwide, with Europe now becoming another epicentre of the pandemic.

SRs Could Provide Some Buffer to Decline in Travel Demand

Our channel checks relayed that hotel industry’s occupancy rate in Singapore has dropped to ~30% in MTD March vs. February’s occupancy rate of ~40%. Serviced residences (SRs)’s performance was better than hotels (occupancy rate ~ 60-70% in MTD March) due to its focus on corporate, longstaying guests. ART’s occupancy rate in China dropped to ~50% in February vs. the average rate of ~80% before the outbreak of COVID-19. However, the situation in China is showing some signs of stabilising in terms of cancellation rate and occupancy rate, with better performances from first-tier cities than second-tier cities. While Australian market is still holding up well, partly boosted by domestic travelers, ART’s properties in Japan saw some decline in occupancy rate due to the cancellations from leisure travelers.

Diversified Portfolio With Reduced Concentration Risk Post-merger

After the merger with AHT, ART’s portfolio was further diversified with no country contributing more than 20% of ART’s gross profit. For 4QFY19, ~38% of gross profit was contributed by stable income from properties on master leases and management contracts with minimum guaranteed income, while the remaining 62% was from properties on management contracts.

With the inclusion of AHT properties, the contribution by stable income is expected to increase to 45-50%. While travel demand is likely to be weighed by the outbreak of coronavirus, ART’s focus on corporate, long-stay serviced residences could provide a buffer to shortterm fall in occupancy and room revenue. However, near-term impact is inevitable and we thus increase our COE assumptions from 7.2% to 8.3% to take into account the higher risks.

After adjustments (COE: 8.3%, risk-free rate: from 2% to 1.55%), our DPU forecasts for FY20/21F decrease by 13%/2%. our fair value estimate hence decreases from S$1.41 to S$1.11.

Source: OCBC Research - 16 Mar 2020