Longer-stay lodging segment holding more than its weight
- Portfolio RevPAR in 1Q22 rose 22% y-o-y to S$67 with pent-up demand reflecting more strongly in Mar 22
- Early entry move into longer-stay lodging assets paying off as they pull off more than their weight (28% gross profit contribution on 17% AUM exposure) with resilient occupancies of above 95%
- 12% CAGR in DPUs between FY22-24; Further asset recycling with substantial debt headroom of S$1.8b to drive higher accretion through acquisitions
- Maintain BUY, higher TP of S$1.40, with target 1.18x P/NAV
Investment Thesis
On the cusp of a multi-year recovery trajectory. ART currently trades at book at 1.0x P/NAV and on attractive 4.9% forward FY22 yields. Compelling growth in DPU supported by more resilient income from longer-stay lodging assets; we estimate a 12% CAGR in DPU between FY22-24.
Right time and right place with early move in longer-stay asset class paying off. ART’s first-mover advantage in the student accommodation and multi-family asset classes has been paying off, with cap rates compressing 50-100bps in the asset classes over the past year. The longer-stay asset class is holding more than its weight with a c.28% gross profit contribution on a c.17% AUM exposure. ART is to increase its exposure to this asset class to 25%-30%, while targeting to increase its stable rent income stream. Robust DPU growth trajectory to be led by ART’s c.70%-75% exposure in the hotels and serviced residences asset classes, which are on the cusp of RevPAR recovery as most major markets reopen borders internationally in end-1Q22.
More asset recycling and inorganic growth potential not priced in. We believe ART will continue with its current strategy in asset recycling to drive earnings and an NAV upside. A healthy gearing level of 38% and S$1.8bn debt headroom could mean that the long-awaited acquisition of the sponsor’s S$1.0bn US multi-family portfolio may be considered in 2022.
Valuation:
Our DCF-backed target price is raised to S$1.40 as we roll forward to FY23F earnings, and c.S$850m of acquisitions in the past year in the longer-stay lodging asset class has been fully priced into estimates. Future acquisitions to pose an upside to the TP and are not incorporated into the current estimates.
Where we differ:
We believe large domestic travel markets continue to be well sheltered from the faltering developments in border reopening.
Key Risks to Our View:
Omicron development to cause a longer-than-expected delay to global border reopening.