• RevPAU down 23% YoY in 1Q20 and 18 properties temporarily closed.
• Self-isolation clients and COVID responders shored up occupancy in SG and US to 80%.
• Maintain BUY with lower TP of $1.17 (prev. $1.53). We lowered our FY20e gross profit (NPI) forecast by 13.9%, reducing our RevPAU estimates by 20% to 30% for the full year. FY20e DPU has been cut by 15.4% to 6.87cents, representing a yield of 8.0%. The change in our target price is largely due to the higher cost of equity assumptions incorporated in our valuation, raised from 7.2% to 8.5%.

The Positives

• Balanced lease structure mitigates the impact of COVID-19 outbreak. ART targets a 50:50 split between stable and growth (variable) revenue. Stable revenue is generated by leases that stipulate a minimum rent that ART can expect to receive (master leases (ML) and management contracts with minimum guaranteed income (MCMGI)), while the growth revenue is from assets on management contracts, where ART’s revenue is based on the occupancy and room rates charged. The Sponsor, The Ascott Limited (TAL), is the master lessee of Ascott-branded SRs that are on ML and we do not foresee any default risk related with TAL. However, the master lessee of in 3 of the ML assets in Japan, WBF Hotels & Resorts, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April (elaborated below). Apart from the 3 WBF ML, 5 other assets are master leased to third party operators.
• Occupancies at MC assets above breakeven occupancy (c.40%). ART enjoys a relatively high steady-state occupancy level due to the long-staying clientele that their portfolio of 59 Serviced Residences (SRs), 11 rental housing and 18 hotels/business hotels. We understand from the management that baseline occupancy from long-stay clients are in the 40% to 50% region. Figure 1 outlines ART’s performance in the key markets that ART operates in and Figure 2 shows the average length of stay by country.
• Pursuing alternative sources of revenue to shore up occupancy. While most of the countries ART operates in have enacted lockdowns and bans on international travel, alternative sources of revenue have emerged. In Singapore, occupancies fell to c.60% in March, however, block booking of Park Hotel and Somerset Liang Court by the government as quarantine facilities, Malaysians affected by the border closure and those choosing to self-isolate in hotels/SRs have helped to bump occupancy up to c.80%. Similarly, DoubleTree by Hilton New York and Sheraton Tribecca New York’s occupancies were lifted by healthcare workers and COVID-19 responders – occupancy at these properties were c.80%.

The Negatives

• 18 properties temporarily closed as at 30 April 2020, comprising 11 properties in France (ML), 4 in Japan (2 ML, 2 MC), and 1 each in Belgium (ML), Spain (ML) and South Korea (ML). Some of the properties were mandated to close by the government and others were close due to soft demand (Paris) or to optimise resources.

Outlook

WBF Hotels & Resorts (WBF), the master lessee in 3 Japan properties, has filed for civil rehabilitation (i.e. bankruptcy) on 27 April 2020. These 3 properties are located in Osaka (of which 2 are closed) and makeup c.1.8% of ART’s valuation. They would have contributed S$6.7mn in rent on a full-year basis. WBF has paid rent up till April 2020 and 3 months’ worth of security deposits are held in escrow. WBF is Japanese owner-operator, with 15 properties on their books and managed 30 properties. ART is in discussions with TAL, amongst other operators, to take over operations, if necessary. TAL operates 8 SRs in Japan, 4 of which are under ART’s portfolio.

Perps – S$250mn 3.86% perps are callable in June 2020. Several options are available to ART, all of which should result in cost savings. ART can let the coupon reset (next rate will be c.3.4%, with an option to call the perps every 6 months), call the preps and reissue new perps, refinance the perps with debts (gearing will move to c.39%).  In this current climate, we think ART will likely let the coupon reset at a lower rate. For reference, ART refinanced S$150mn 5% of perps with S$150mn 3.88% perps in September 2019, capturing c.S$1.7mn in savings.

Deferrals – Some operators have asked for rental deferments. Deferred rent will be paid in instalments over the next two quarters.

Revaluation risk – Drawing on the GFC for reference, valuation fell by c.6%.

Lease renewals (of MLs) – All of the master leases due for renewal are with the Sponsor, hence renewal risk is low.

Bank Covenants – Sufficient buffer of 30% to 50%o on LTV covenants. ART has negotiated with their lenders to have the ICR testing covenant waived temporarily.

Maintain BUY with a lower target price of $1.17 (prev. $1.53).

We lowered our FY20e gross profit (NPI) forecast by 13.9%, reducing our RevPAU estimates by 20% to 30% for the full year. FY20e DPU has been cut by 15.4% to 6.87cents, representing a yield of 8.0%. The change in our target price is largely due to the higher cost of equity assumptions incorporated in our valuation, raised from 7.2% to 8.5%.

Source: Phillip Capital Research - 8 May 2020