• Ascott Residence Trust’s 1HFY21 DPU of S$0.02045 (+95% y-o-y) was in-line at ~50% of our FY21F, mainly due to income top-up amid a strong cash position.
• H-o-h revenue and gross profit improved 15% and 35% respectively. RevPAU has been improving on a q-o-q basis since 2Q20.
• Reiterate ADD. We think recovery going forward will be more sustainable.

Ascott Residence Trust's 1HFY21 Gross Profit Declines on Y-o-y Basis But Improves H-o-h

• Ascott Residence Trust (SGX:HMN)’s 1HFY21 DPU was S$0.02045 (+95% y-o-y) as the REIT topped up S$20m to share divestment gains to replace the income loss from divested assets and mitigate the COVID-19 impact on distributions. There was also a one-off termination fee income (S$9.3m) and realised exchange gain (S$9m).
• Ascott Residence Trust's 1HFY20 revenue/gross profit fell 11%/7% y-o-y due to divestments and as COVID-19 had a lesser impact on 1Q20. On a same-store basis, revenue was 7% lower y-o-y but gross profit was relatively stable as lower operating costs mitigated the softer revenue. On a h-o-h basis, revenue improved 14.7% y-o-y while gross profit increased 34.5% y-o-y.
• All in, while 1HFY21 revenue (44% of full year) and gross profit (46%) came in below our expectations, Ascott Residence Trust's 1HFY21 DPU was in-line at 49.6% of our FY21F DPU largely due to income top-up.
• In 2Q21, portfolio RevPAU rose 76% y-o-y and 18% q-o-q to S$65. In fact, Ascott Residence Trust’s portfolio RevPAU has been improving on a q-o-q basis since 2Q20. Most of the markets reported stronger RevPAU q-o-q in 2Q21 driven by higher average occupancy which rose from ~50% in 1Q21 to mid-50% as higher vaccination rates aided further easing of restrictions.
• China continued to lead the recovery with higher corporate demand; Europe benefited from summer leisure demand; while block bookings in Australia, Singapore and USA, and long stays in Indonesia, Philippines and Vietnam offered income stability in these countries.

Strong Cash Position Provides Acquisition Flexibility

• Ascott Residence Trust’s gearing as at 1HFY21 lowered to 35.9%, which provides substantial debt headroom of ~S$1.9bn and the flexibility to acquire. There are no more lease expiries for master leases in 2021. Ascott Residence Trust continued to be active in capital recycling. It received S$580m of divestment (~2% average exit yield) proceeds in 2020 and 2021 and redeployed S$285m into longer WALE PBSA and rental housing at an average EBITDA yield of ~5%.
• We expect Ascott Residence Trust to aggressively seek out acquisition targets to offset the income vacuum created by its divestments. It has > S$300m capital gain remaining which could underpin distribution stability. Ascott Residence Trust will distribute some to shareholders in 2H21.

Reiterate ADD With a Higher DDM-based Target Price of S$1.22

• We adjust our FY21-23F DPU forecast for Ascott Residence Trust by -2.4% to +2.6% after factoring in higher income top-up, lower operating expenses and slower-than-expected recovery. With rising vaccination rates globally, we think the recovery going forward would be more sustainable.
• With its longer WALE and diversified geographies, Ascott Residence Trust has demonstrated its resilience during these trying times.
• Upside/downside risks include faster/slower recovery from COVID-19.

Source: CGS-CIMB Research - 27 Jul 2021