• No financials provided in this business update. 3Q22 gross profit is at c.90% of pre-COVID-19 levels. Portfolio RevPAU jumped 88% YoY to S$132 due to higher average daily rate and occupancy (>70%), and is c.87% of 3Q19 pro forma RevPAU.
• 76% of debts at fixed rate. Every 50bps rise in interest rates would impact DPU by c.2%.
• Upgrade to BUY, DDM-TP lowered from S$1.24 to S$1.13. FY22e-FY24e DPU lowered by 5-7% on the back of foreign currency headwinds and an enlarged share base from the private placement as we pencil in the acquisition of S$318.3mn in assets. Our cost of equity increased from 8.14% to 8.34% on a higher risk-free rate assumption. Catalysts include the reopening of China, opportunistic divestments, and acquisitions of extended stay assets to raise the proportion of stable income sources to 25-30% to cushion the impact from recessionary concerns, rising inflation and macroeconomic uncertainties.

The Positives

• 3Q22 RevPAU grew 88%/6% YoY/ QoQ, currently at 87% of pre-pandemic levels. YoY improvement was driven by both higher average daily rates (ADRs), which is up c.50% YoY in 3Q22, and higher occupancy of >70% in 3Q22 (3Q21: 55%). All markets experienced strong RevPAU growth YoY except for China and Japan (see Figure 1), with Australia, US and UK RevPAU close to pre-COVID-19 levels. Singapore exceeded pre-COVID-19 levels with the F1 Singapore Grand Prix boosting demand. Japan’s 3Q22 RevPAU was 12% lower YoY due to a strong base as Tokyo properties benefitted from the Olympic Games in 3Q21. Growth in Japan could pick up quickly after its reopening, supported by the weak yen and its popularity as a tourist destination.
• Extended stay segment remains resilient, comprising c.15% of 3Q22 gross profit. Occupancy of the longer stay properties remained stable at >95%. Student accommodation is 99% leased for the academic year 2022-2023, with above market rent growth of c.6% YoY. The proposed acquisition of 9 properties in France, Japan, Vietnam, US and Australia will increase the proportion of longer-stay asset allocation from 17% to 19%, keeping CLAS on track to achieve its target asset allocation of 25-30%. Longer-stay accommodation offers income stability as the hospitality properties capture growth from recovering markets.
• High proportion of debts at fixed rate, c.76%, locked in for a weighted average of c.3.5 years. CLAS managed to maintain its low effective borrowing cost at 1.7% this quarter after repaying and refinancing the majority of debt due in 2022, with only RMB debts remaining. Every 50bp change in interest rates would have a c.2% impact on DPU.

The Negative

• The Strong Singapore Dollar continues to impact DPU. The impact of foreign exchange after hedges in place on gross profit was 2.1% for 9M22. CLAS adopts a natural hedge wherever possible by borrowing in the currency of the underlying assets. A 5% depreciation in foreign currency implies a c.3% impact to DPU.

Outlook

Forward bookings indicate sustained pent-up demand, with more corporate and international travel returning, enabling CLAS to raise room rates and abate rising utility and labor costs. Electricity cost has increased but remain <10% of OPEX. Most of CLAS’ electricity requirements have been hedged through fixed rate contracts. Electricity charges are passed through to tenants in US student accommodation and Japan rental housing properties, while utility usage above a certain threshold will be passed through to guests in long-staying SRs.

In terms of capital management, CLAS’ gearing of 35.8% means a debt headroom of c.S$2bn, leaving room for it to reach its medium term asset allocation of 25-30% for longer-stay accommodation.

Upgrade to BUY, DDM-based TP lowered from S$1.24 to S$1.13

FY22e-FY24e DPU lowered by 5-7% on the back of foreign currency headwinds and an enlarged share base from the private placement. We also pencilled in the acquisition of S$318.3mn in assets that are expected to be completed in 4Q22. Our cost of equity increased from 8.14% to 8.34% on a higher risk-free rate assumption. Catalysts include the reopening of China, opportunistic divestments, and acquisitions of extended stay assets to raise the proportion of stable income sources to 25-30% to cushion the impact from recessionary concerns, rising inflation and macroeconomic uncertainties. CLAS remains our top pick in the REIT sector with its geographically diversified portfolio, range of lodging asset classes, stable income base which has proven its resilience through COVID-19, and a strong sponsor.

Source: Phillip Capital Research - 1 Nov 2022