• Ascott Residence Trust's FY20 full-year DPU of 3.03 cents exceeds estimates with divestment gain top-ups.
• Domestic travel on a rocky road to recovery with returning COVID clusters.
• Decline in Ascott Residence Trust's portfolio valuations of 7%.
• Maiden acquisition into student accommodation asset class in the US.

Ascott Residence Trust's FY20 Results Summary

Sharing of past gains boost DPUs for FY20

• Ascott Residence Trust (SGX:HMN)'s FY20 full-year distribution of S$0.0303/unit exceeded our full-year forecast of S$0.027/unit, with a 100% payout ratio. The outperformance came from a total top-up of S$45m (S$40m in 2H20), of which S$5m was previously retained from 1H20 income and S$40m from Ascott Residence Trust’s divestment reserves.
• While greater stability in operations ensued in the latter half of the year, underlying asset performance continues to remain weak with operational outlook affected by lockdowns (in selected geographies).
• Portfolio RevPAR declined 30% from S$70 in 1H20 to S$49 in 2H20, with a greater impact felt in 2H20 due to acceleration of the lockdowns to curb the pandemic spread.
• Ascott Residence Trust's gearing inched higher to 36.7% due to asset devaluations; still within a comfortable level.

Outlook & Recommendation

Robust financial war chest; liquidity to weather ~3 years’ worth of fixed costs

• We understand that there remains approximately S$200m in Ascott Residence Trust’s divestment gain reserves accumulated since 2018, of which S$40m was returned to unitholders in 2H20. These sums will come in handy in the event that the manager needs to stabilise DPU in the coming year in the event of a longer-than-anticipated upturn in the global travel market.
• Financial war chest remains robust with ~S$1.05bn in total funds and sufficient for Ascott Residence Trust to cover ~3 years’ worth of fixed costs under the worst-case, zero-income scenario.

A mixed outlook for its key markets; but worst (in operations) is likely over

• Ascott Residence Trust's portfolio occupancy increased q-o-q to ~45% this quarter, an indication that the freeze in travel demand that the REIT saw in 3Q20 is starting to thaw. RevPAR for assets under management contracts declined 68% y-o-y from S$158 in 2H19 to S$50 in 2H20.
• 10 of Ascott Residence Trust’s 102 properties remain temporarily closed (of which six are on master lease arrangements). These include five in France, two in Japan and one each in Belgium, Spain and South Korea, as certain assets have yet to meet a breakeven level of room demand or to consolidate resources; that said the number of hotels closed is lower than 3Q20.
• Block bookings continue to support some of Ascott Residence Trust’s assets in Singapore, Australia and the US and mitigated the temporary absence of transient demand but we reckon that these bookings might fall by 2H21, implying the need to find alternative sources of demand by then.
• China (occupancy stable at 60%) and Vietnam continue to recover ahead of the rest through long-stay corporate demand.

Marginal decline in percentage of rental contribution from master leases and MCMGI

• Master lease, management contracts with minimum guaranteed income (MCMGI) and management contracts contributed 60 : 6 : 34 to total gross profits for Ascott Residence Trust in FY20 but we estimate that the percentage of master lease rent will fall from 60% to 58% in the interim due to lease restructuring and renewals.
• We continue to see short-term lease restructuring (master lease / MCMGI to short lease management contracts) in the interim due to operational weakness, the latest being three UK properties that were due to expire on 30 April.
• This is above the recent master lease restructuring in France that will be renewed to include a variable rent component from a fully fixed rental structure, which we expect the full impact to be reflected in 4Q21.
• While we believe that Ascott Residence Trust may lose the stability offered by the master leases, the restructuring will in the medium term position the REIT to capture upside in operational performance from the coming upcycle in travel demand from 2021 onwards.

Portfolio decline of 7% in line with expectations (of between 5% and 10%)

• Ascott Residence Trust’s portfolio valuation declined 7% y-o-y led by US assets (-17%), China (-11%) and UK (-11%); markets that have more management contracts, likely due to a reset in cashflow projections from valuers. Valuation for Singapore assets remained flat at -1% y-o-y with capital value holding up better than expected.
• Higher cap rates and discount rates were used in the latest round of valuation, and we suspect that the cash flow assumptions may have changed alongside the lease renewals in some of these markets.
• We understand that the valuers have priced in a 4- to 5-year recovery curve in their assumptions to support the latest valuation assumptions, which is in line with ours. That said, we remain optimistic in the medium term that a faster-than-anticipated recovery could be a catalyst for higher valuations.
• While the drop in valuation has resulted in a decline in NAV to S$1.15/unit (implying a P/NAV of 0.95x), we believe that this does not signal a possible “market price” for Ascott Residence Trust properties as the manager is still able to divest its portfolio at attractive premiums to NAV and cap rates.

Maiden acquisition within the student accommodation asset class

• Ascott Residence Trust announced the acquisition of Signature West Midtown (Atlanta, Georgia, US) for S$126.3m or on a 5% EBITDA yield.
• The 183-room, 525-bed asset sits on freehold land with a net rentable area of approximately 216k sqft and was newly constructed in 2019.
• Georgia Institute of Technology (Georgia Tech) is situated a stone’s throw away (5-15 minutes’ walk) with an estimated student population of 40,000, of which about 80% of students live in off-campus housing. Operations wise, the asset was able to reap an average occupancy rate of ~95% in 2020 with an average length of stay of one year. The acquisition is targeted to be completed by end-1Q21.
• Entry into a more resilient asset class would increase cash flow certainty for Ascott Residence Trust, especially given the long average length of stay of one year for students’ accommodation. Demand exposure is also primarily to the more resilient domestic market, and does not rely highly on international students.
• The acquisition came as a positive surprise to us as the market expected Ascott Residence Trust to acquire the sponsor’s multi-family portfolio in US. We believe that Ascott Residence Trust jumped on the deal due to the attractive price at a 5% yield given today’s compressed cap rate environment for PBSA assets in the range of 4-4.5%.
• While the acquisition size is small, the deal gives unitholders a better idea of the path of resilience Ascott Residence Trust has drawn with a specific interest to lengthen the average stay within the portfolio. Given the recent portfolio rejuvenation spree, we think that execution of the multi-family US portfolio may occur this year.
• We see an opportunity for Ascott Residence Trust to tap into the PBSA asset class in 2021 to diversify and add resilience to its portfolio going forward.

Source: DBS Research - 28 Jan 2021