Slow RevPAU Recovery, Undemanding Valuations

• Ascott Residence Trust (SGX:HMN)’s 1H20 DPU declined 69.4% y-o-y and 74.9% h-o-h due to weak occupancies, which fell y-o-y from ~80% to ~50%, and a 52% decline in RevPAU. Contribution from ‘stable income’ has risen with the addition of Ascendas Hospitality Trust’s master leases, while two recently announced divestments should return SGD191.4m and further strengthen its balance sheet.
• With RevPAU recovery in FY20 likely to be slow, we lowered DPUs by 5%.
• We like Ascott Residence Trust's diversified portfolio and concentrated long-stay assets. Its SGD150m in residual divestment gains will support capital distributions amid slower DPU growth.
• Ascott Residence Trust's valuations are undemanding at 0.8x P/B. Our DDM-based Target Price is now SGD1.05 (COE 6.7%, LTG 2.0%). Stay at BUY.

Weak Results – China, Singapore Fared Better

• Ascott Residence Trust's 1H20 revenue declined 16.1% y-o-y and 21.8% h-o-h due to the divestment of Ascott Raffles Place Singapore and Somerset West Lake Hanoi, and lower portfolio revenue. This was partially offset by contributions from Ascendas Hospitality Trust’s portfolio from Jan 2020 and the acquisitions of Quest Macquarie Park Sydney (Feb 2019) and Citadines Connect Sydney Airport (May 2019).
• Ascott Residence Trust's assets in China and Singapore, which serve long-stays, fared relatively better. Despite lower occupancies, ADRs in China were stable, supported by recovery in domestic demand, especially in its tier-1 markets.

Master Leases to Support DPUs

• Gross profit from its ‘stable’ income rose 27.3% y-o-y and 15.1% h-o-h, as the addition of Ascendas Hospitality Trust’s eight properties in Japan, S.Korea and Singapore and the Quest Macquarie Park Sydney offset weak demand and property closures in Europe.
• Gross profit from its ‘growth’ income declined 60.8% y-o-y and 62.3% h-o-h, and contributed 33.7% of its gross profit, down from 60.9% in 2H19 and 62.3% in 1H19. We expect its master leases and minimum income contracts to support DPUs into 2H.

Divestments a Further Boost to Balance Sheet

• Ascott Residence Trust will divest its Ascott Guangzhou (at 3% cap rate) and Citadines Didot Montparnasse Paris (at 4% cap rate) for a total of SGD191.4m, at 52% and 69% above their respective book values, to realise SGD23.2m in net gains. Its leverage at 36.1% as of end-Jun 2020 should improve to 34% upon completion of the deals.

Source: Maybank Kim Eng Research - 28 Jul 2020