• Ascott Residence Trust's 1H20 DPU missed estimates.
• Seven out of 88 properties closed at the moment and rescheduled to open in 3Q20.
• Portfolio RevPAU declined 52% y-o-y but portfolio operates above breakeven.
• Capital and liquidity reserves of S$850m to provide a strong buffer.

Maintain BUY

• We maintain our BUY recommendation on Ascott Residence Trust (SGX:HMN) despite its earnings miss in 1H20.
• Ascott Residence Trust’s appetite for portfolio rejuvenation remains robust despite on-going headwinds, powered by a debt headroom of above S$1bn. Capital and liquidity reserves of S$850m will serve as a safety net towards lessee rental reliefs and potentially supplement distributions.
• Our target price implies a target FY21F yield of 5.1% and a price-to-book of 0.88x.

Early Issuance of Profit Warning; 1H20 DPU Misses Estimates

• Ascott Residence Trust's 1H20 revenue and gross profit declined by 16% and 28% y-o-y to S$208.5m and S$88.6m respectively. The lower topline was attributed to lower contributions from Ascott Residence Trust’s portfolio amid the COVID-19 pandemic as well as divestments and acquisitions over the past year.
• Contributions decreased from the divestment of Ascott Raffles Place Singapore and Somerset West Lake Hanoi and increased from Ascendas Hospitality’s portfolio and the acquisition of Quest Macquarie Park Sydney and Citadines Connect Sydney Airport.
• Ascott Residence Trust announced a 1H20 distributable income of S$32.6m (-56% y-o-y), which includes a S$5m capital distribution. DPU for 1H20 is 1.05 Scts (-69% y-o-y), and makes up 23% of our full-year forecast at 4.53 Scts.
• Ascott Residence Trust will be maintaining a 90% distribution policy for the full year, with the inclusion of net overseas income.

Seven Out of 88 Within Ascott Residence Trust’s Portfolio Closed at the Moment

• 21 properties undergone temporary closures in 1H20, of which only seven are currently still shut and are rescheduled to open in 3Q20.
• International tourist arrivals fell 22% y-o-y globally in the first quarter of 2020, with the World Tourism Organisation forecasting a 58% to 78% decline for 2020.
• International demand in APAC and Europe is expected to recover ahead of the US, with Ascott Residence Trust having a 68% and 20% exposure in these two markets respectively. With domestic travel anticipated to make up the first wave of demand, Ascott Residence Trust has leveraged from the ‘work from home’ trend to introduce work-stay packages at some of the properties.
• Portfolio occupancy in 1H20 averaged 50% (1H19 occupancy: 80%), but remains above breakeven levels.

Capital and Liquidity Reserves a Strong Safety Buffer

• Ascott Residence Trust has capital and liquidity reserves amounting to S$850m, comprising of S$620m in available cash & credit facilities, S$163m in cash divestment proceeds to be received from Somerset Liang Court and S$60m in additional credit facility secured this month. These reserves will be sufficient to cover 2 years’ worth of fixed cost under the worst-case zero income scenario.
• In addition, Ascott Residence Trust’s divestment of Ascott Guangzhou and Citadines Didot Montparnasse Paris for S$191.4m will realise net gains of S$23.2m upon completion.
• Cost of borrowing remains low at 1.8% per annum with 80% of debt hedged on a fixed rate.
• Ascott Residence Trust's gearing remains healthy at 36.1% with ICR at 3.6 x.

Ascott Residence Trust - Our Recommendation and Outlook

Master leases and MCMGI to provide a barrier of safety (c.45% of income with in-built stability on a normalised basis)

• Master lease revenue held up well, increasing 51% y-o-y, due to the inclusion of eight master lease assets from Ascendas Hospitality Trust’s portfolio.
• Management contracts with minimum guaranteed income (MCMGI) and management contracts dipped 39% and 27% y-o-y, respectively, from weaker demand and lower RevPAU.
• For the period, master leases : MCMGI : management contracts contributed 59% : 7% : 34% to gross profits respectively.
• On-going developments at Somerset Liang Court and lyf one-north have also resumed and remain on track for completion.

Focus on domestic travel; further relaxation of measures anticipated in the next quarter

• RevPAU in China and Singapore held up relatively better, declining 34% and 25% y-o-y in 1H20. Room rate recovery in China will give us a sense of where RevPAU might recover to towards 2H20.
• Within Singapore, government hotel bookings for stay home notice residences may reflect occupancy strength in the 2Q20 but may see a declining momentum for the rest of the year. We view phased reopening as a positive sign that portfolio assets have attained at least a breakeven level of operations and the relaxation of mandatory hotel closures to be a positive sign within the respective markets.
• 1H20 results will likely represent a trough, and we anticipate a better 2H20, led by markets that saw weaker demand or temporary closures (the UK, US and Japan).

We cut our DPU assumptions by 42% / 22% to 2.64 / 5.56 scts for FY20 / FY21 to factor in a slower growth profile.

• We maintain our initial assumption of a two-year normalisation period for DPU to recover to pre-COVID levels at 7.77 Scts in FY22, implying an attractive yield of 8.4% at current price. Target price for Ascott Residence Trust remains unchanged at S$1.10 as we roll forward our DCF backed valuation to FY21F.

Source: DBS Research - 28 Jul 2020