Room Rates Heading Higher Due To Rapid Recovery In The US and Europe
ART’s properties in the US, the UK and continental Europe have experienced a rapid
recovery since May 22 with RevPAU near pre-pandemic levels in 2Q22 and poised to
scale greater heights in 3Q22, boosted by the summer holidays. ART has raised the
asset allocation target in longer-stay assets, such as student accommodation and
rental housing, by 10ppt to 25-30% of portfolio value. Distribution yield is expected to
improve from 4.8% in 2022 to 5.8% in 2023. Maintain BUY. Target price: S$1.33.
WHAT’S NEW
• Ascott Residence Trust (ART) benefits from strong pick-up in demand in countries with large
domestic markets, such as the US, the UK, Japan and Australia due to pent-up demand
since Mar 22. International leisure and corporate bookings are rapidly recovering as many
countries have reopened their borders to vaccinated travellers. Business executives have
also started to travel to reconnect with customers, link up with colleagues, and network at
conferences.
• Braving inconveniences to travel. The sudden surge in air travel has caught airlines and
airports off guard. Travellers have experienced long waits to get through security checks at
London Heathrow Airport, Manchester Ringway Airport and Sydney Kingsford Smith Airport.
Travellers’ willingness to contend with rising air ticket prices and COVID-19 related logistics
issues, including the risk of delays and flight cancellations, demonstrates the resiliency and
strength of the pent-up demand.
• US: Benefitting from surge in domestic leisure demand. Recovery for ART’s three hotels
in New York started in Feb 22, driven by domestic leisure travel, which is already near prepandemic levels. Demand from domestic business travel has started to normalise. Although
business travellers are making fewer trips, they are staying longer at each destination.
Industry peers, Hilton and Marriott, have attested to the trend of rising room rates. Their
RevPAR was 25% above pre-pandemic levels during the Memorial Day weekend in lateMay. International bookings have picked up in 2Q22 and the recovery is expected to further
accelerate in 3Q22 due to lifting of COVID-19 testing requirements for inbound air travellers
since mid-June.
• UK: Firing on all cylinders. Demand from business travel and corporate groups has picked
up since Feb 22, which has led to higher room rates. Bookings from international travellers
have already grown to account for 40% of its business in 1Q22. The recovery is further
strengthened by the pick-up in domestic travel and the slew of public holidays (Easter, Bank
Holiday and Platinum Jubilee weekend) in 2Q22. Many Britons are travelling domestically for
their summer holidays (staycation) in 3Q22 to avoid chaos and congestions at the airports.
According to tour operator Tui, bookings for summer holidays in the UK are about 20%
higher than pre-pandemic levels.
• Europe: Western Europe benefits from diversion of traffic. ART’s 23 properties in
Belgium, France, Germany and Spain benefit from recovery in short-haul intra-regional
travel. Nine of its 15 serviced residences in France are in Paris, which is one of the world’s
most popular tourist destinations. American tourists are back to taking their long-delayed
overseas vacations in Europe. There is also diversion of traffic from Eastern European
countries, such as Czech Republic, Hungary and Poland, due to the Russia-Ukraine war.
Bookings are already above pre-pandemic levels for budget carriers EasyJet and Ryanair in
May and June. We expect RevPAR to be near pre-pandemic levels in 2Q22 and surpass
pre-pandemic levels in 3Q22, driven by peak seasonal demand for summer holidays.
• Australia: Benefitting from domestic interstate travel. Some of ART’s hotels have
transitioned from block bookings to serving public guests in 1Q22. Pent-up demand and
improved travel confidence have led to a surge in bookings since Mar-Apr 22, especially for
its properties in Sydney and Perth. Demand from the corporate segment spiked in Mar 22 as
companies restarted business travel. Citadines Connect Sydney Airport benefits from the
surge in air passenger traffic in 2Q22. Pullman and Mercure Melbourne Albert Park
benefitted from F1 Grand Prix in Apr 22, which was held nearby at Albert Park Circuit.
STOCK IMPACT
• Setting sights on a higher goal. Management plans to raise the asset allocation target in
longer-stay assets by 10ppt from 15-20% to 25-30% in the medium term.
• Pivoting towards longer-stay properties. Occupancy for its student accommodation
properties in the US was close to 100% in 1Q22. Pre-leasing momentum has improved and
management plans to increase room rates for student accommodation properties by 5% for
academic year 2022/23. Occupancy for rental housing properties in Japan was above 95%.
Longer-stay properties, such as student accommodation & rental housing, accounted for
28% of gross profit in 1Q22 and 17% of AUM as of Mar 22.
• Value creation through asset recycling. ART divested six properties at an average exit
yield of 2% and total proceeds of S$580m. It unlocked divestment gains of about S$225m.
The capital freed up was reinvested in 11 yield accretive rental housing and student
accommodation properties for total consideration of S$780m and an average EBITDA yield
of 5%. ART’s longer-stay assets currently account for 17% of AUM.
EARNINGS REVISION/RISK
• We raise our DPU forecasts for 2022 and 2023 by 5.7% and 4.5% respectively due to a
rapid recovery in the US, the UK and continental Europe. Our upward revision is
tempered by the depreciation of British pound by 6.8% (7% of total assets), euro by 4.3%
(12% of total assets) and Japanese yen by 12.8% (19% of total assets) against the strong
Singapore dollar.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$1.33 is based on DDM (cost of equity: 7.25%, terminal
growth: 2.6%).
SHARE PRICE CATALYST
• Yield-accretive acquisitions for student accommodation and rental housing.
• Maiden development project lyf one-north, which had its soft opening in Nov 21.
• Recovery of the hospitality industry in Europe, Americas, Japan and Singapore, followed by
other countries in the Asia Pacific region.
