Analysts remain optimistic on Ascott Residence Trust (ART), in spite of its “weaker-than-expected” performance for 1H2020 ended June 30.

The trust’s distribution per stapled security (DPS) fell 69% to 1.05 cents in 1H2020, from the 3.43 cents disbursed in the year earlier.

Distributable income correspondingly fell 56% y-o-y to $32.6 million.

This follows a 16% dip in revenue to $208.5 million, from the $248.4 million logged a year ago. The trust attributes this to a $4.2 million drop in income from its divestment of Ascott Raffles Place Singapore and Somerset West Lake Hanoi. It was also hit by lower takings of $91.1 million from its existing portfolio, the managers said in a regulatory filing on July 28.

A further decrease was mitigated by the $55.4 million contribution from its acquisitions of Citadines Connect Sydney Airport in May 2019, Ascendas Hospitality Trust’s (A-HTrust) portfolio in Dec 2019 and Quest Macquarie Park Sydney in February.

To reduce the effect of the lower revenue, ART has included a $5.0 million top-up in the distribution for 1H20.  The eventual distribution of the retained 15% will depend on the final income for distribution based on the results for the full year ending December.

See: Ascott Residence Trust posts 69% dip in 1H20 DPS of 1.05 cents

Meanwhile, it is also looking to grant further rent deferment or waivers to tide its tenants through this crisis.

ART’s portfolio comprises 88 properties scattered across Asia Pacific, Europe and the US. These translate to over 16,000 units offering serviced residences, hotels, rental housing properties and other hospitality assets.

Collectively, they had an asset value of $7.4 billion, as at December 2019.

With 21 of these properties having to shut down in 1H20, ART’s revenue per available unit (RevPAU) fell 52% y-o-y to $70. This follows the travel restrictions and lockdowns imposed to curb the spread of the Covid-19, OCBC’s Equity Research team points out in a July 29 note.

“ART’s key markets such as Japan, Singapore, Australia, US and China’s performances saw 25%-68% declines in RevPAU,” they elaborate. Specifically, Singapore – which accounts for 17% of the trust’s total assets – RevPAU was down 25% y-o-y to $147.

The OCBC team believes that bulk bookings made by for self-isolation, healthcare personnel and workers affected by the shutdown, buttressed a further dip in occupancy levels. The management expects this buffer to extend till 3Q20 given the lineup of contracts from the government.

Looking ahead, it hopes to host staycations in Singapore in line with the Singapore Tourism Board’s $45 million marketing campaign aimed at reviving domestic tourism.

However, the same cannot be applied to Japan – where 20% of its assets are held, and RevPAU plunged 68%.

“The outlook remains challenging despite resilient contribution from 11 rental housing properties (occupancies remained high at >90%),” OCBC’s team observes.

Operations there are also impeded by WBF Hotels & Resort’s (WBF) bankruptcy filing in 1Q20. WBF is the master lessee to three ART properties in Osaka (of which two are closed), and make up around 1.8% of the trust’s valuation. It is a Japanese owner-operator with 15 properties on their books and 30 managed properties.

Collectively, they would have contributed $6.7 million in rent on a full year basis, PhillipCapital analyst Natalie Ong estimates.

Agreeing, the OCBC team says “ART has 3 months’ rent in security deposits held in escrow which have been used to offset the rent up to July 2020. ART is in discussions with WBF and other operators to assess the best course of action”.

For now, both Ong and the OCBC team commend ART’s healthy balance sheet which contains $843 million in cash and credit facilities which are “sufficient to cover about 2 years of fixed costs”. 

Such funds comprise $620 million in cash & committed credit facilities, $163 million in proceeds received in July from the divestment of Somerset Liang Court and a $60 million uncommitted credit facility secured this month, Ong details.

“We note that ART’s interest coverage ratio deteriorated q-o-q from 5.1x to 3.6x, however the cash and credit facilities in place will help to weather this period of depressed earnings,” she adds.

To this end, both Ong and the OCBC team have posted “buy” calls on the counter at a target price of $1.08 and $1.03 respectively.

The OCBC team’s lower call price comes from expectations of DPU for FY20/21 to plunge 44/28%. While they see opportunities in the implementation of travel bubbles and domestic tourism, they cautions against a second wave of infections.

Ong meanwhile has lowered FY20e DPU by 21.7% to represents a DPU yield of 6.0%.

“This reflects a slower recovery of international travel, the extension of 4 French ML and 3 UK MCMGI on variable terms, and the sale of Ascott Guangzhou (AGZ) and Citadines Didot Montparnasse Paris (CDMP),” explains Ong. AGZ was divested at 52% above its book value, while CDMP’s transaction of EUR 23.6 million ($38.2 million) was up 69%.

She believes her call gives a 29.2% return from the counter’s 89.5 cent close on July 29.

As at 1.27pm, units at ART were up 0.5 cents or 0.556% to 90.5 cents.