DBS: Ascott Residence Trust – Buy Target Price $1.40

1H22 Results: Strongest recovery quarter since the pandemic!

• 1H22 revenue grew 45% y-o-y to S$267.4m, 1H22 DPU of 2.33 Scts make up 41% of our full year DPU forecast
• Key positives: (i) Strongest recovery recorded in 2Q22 with a 91% growth y-o-y, (ii) Portfolio RevPAU ahead of estimates at c.82% of pre-COVID levels in 2Q22, (iii) Expect RevPAU momentum to continue across all markets, with green shoots potentially from Japan and China
• Datapoints we are watching: (i) More acquisitions within the longer-stay segment to increase current 17% exposure, (ii) Capital distributions for full year, which we have priced in at S$10m in our FY22 estimates
• Maintain BUY with TP of S$1.40

 1H22 Results Summary

 ART’s strongest recovery since pandemic; RevPAU almost doubled y-o-y in 2Q22

• ART reported 1H22 revenue of S$267.4m (+45% y-o-y). Higher revenue was due to acquisition contributions primarily within the longer-stay lodging segment, as well as the Lyf One-North which launched in Jan’22. 
• Apart from inorganic growth, RevPAU rose 60% y-o-y in 1H22 to S$96. 
• The recovery is tilted towards 2Q22, where RevPAU almost doubled y-o-y (+91% y-o-y) to S$120, and was ART’s strongest recovery quarter since the pandemic. 
• Gross profit (GP) rose 44% y-o-y to S$118.2 for the half year. 
• 1H22 DPU rose 14% y-o-y to 2.33 Scts, or 120% y-o-y to 1.78 Scts excluding one-off items such as distribution top up (amounting to S$20m in 1H21). 
• Income sources continued to be well-diversified with stable income sources, comprised of master lease and management contract with min. guaranteed income (MCMGI) and longer-stay assets, contributed to 68% of 1H22 gross profits. 
• Utilities hike temporarily hedged on fixed rates in 3 markets, while utility expenses are passed on to tenants in long stay lodging assets. Staff costs higher at c.10% above 2019 levels. 

 Robust financial metrics

• ART remains well-equipped on the capital management front with stable gearing of 37.5%, a debt headroom of S$1.8bn (to target gearing of 50%). Average cost of debt stood at 1.7% with a weighted average debt expiry of 3.1 years (WADE of 4.6 years for floating loans) and c.80% of debt on fixed rates. 

 Key Observations / Datapoints we are tracking:

• Income from master leases (37% of GP) declined 8% y-o-y (or +7% y-o-y on a same store basis) due to reclassification of Park Hotel Clarke Quay. 
• MCMGI (10% of GP) rose 172% y-o-y alongside RevPAR recovery, while management contracts (53% of GP, including classification of long-stay segment) rose 57% y-o-y with higher gross profits across all countries except China. 
• RevPAR to continue to sustain recovery to close the gap against pre-COVID, portfolio RevPAU stands at c.82% of normalised levels in 2Q22, or c.84% for the month of June. 
• China and Japan: Markets to lead recovery with further relaxation potential will be China and Japan. Japan’s hotel RevPAU is still at c.32% of normalised basis with a long headroom to run. 
• Markets that have done well to see RevPAU matching pre-COVID levels include France and UK. US is also seeing a sharp increase in occupancies back to 80% levels for their New York hotels from strong corporate demand.
• Interest for acquisitions continues to be in longer-stay asset class, current exposure at 17% with medium term target exposure of 25-30%. US PBSAs continue to rank high on ART’s acquisition radar with relatively attractive yield spread and stable operating metrices. 
• Longer-stay segment continue to deliver both stability and rental growth. Occupancy for ART’s longer-stay assets has been maintained at above 95%, with PBSA (purpose-built student accommodation) segment expected to deliver 8% y-o-y rental growth in the coming academic year. 
• We have assumed some form of capital distributions for full year at S$10m. ART distributed S$45m in capital top-ups in the last financial year and still has c.S$300m in capital gain reserves from their divestments since 2018.
• Quantum of capital distributions at year end will likely take into account both acquisition funding needs and full year portfolio and DPU performance. 

 Summary performance by key markets:

Market	2Q22 y-o-y RevPAU growth	2Q21 RevPAU / 2Q22 RevPAU (local curr)	Asset Exposure	Key Observation / Outlook
Australia	+58%	79 / 125	13%	For 1H 2022, revenue was 30% higher y-o-y on recovery demand while gross profit was 16% higher y-o-y to partially offset higher staff cost2Q22 RevPAU approximately at 96% of precovid levelsRebound in demand driven by leisure segment and from events such as the Australian Open in Jan and F1 Grand Prix in April.
China	-20%	273 / 218	4%	On a same-store basis, 1H 2022 revenue and gross profit were 14% and 64% lower y-o-y respectively due to omicron outbreaks and higher staff costs and property tax expense.RevPAU stable q-o-q while occupancy still registered at above 50% in 2Q22 supported by corporate long-stays (of c.8 months)Transient domestic travel picked up gradually towards end 2Q22 alongside easing of lockdown in Shanghai and Beijing. Peak summer holiday and Golden Week to give a travel boost in 3Q22.
Japan	+70%	2,538 / 4,308	18%	Green shoots from the market as Japan lags behind the other markets in the border relaxation curveNo quasi-emergency restrictions or lockdowns since late Mar’22On a same-store basis, 1H 2022 revenue up 12% y-o-y while GP was higher by 14% y-o-y. SR and hotels RevPAU in 2Q22 continues to be at relatively depressed at 32% of pre-COVID levels. Forward booking reflect increased long-stay demand from international visitors in 3Q22. 2 of ART’s WBF branded hotels remains closed
Singapore	+132%	60 / 139	17%	Borders reopened to all fully vaccinated travellers since April’22Citadines Mount Sophia saw strong international corporate demand transiting out of government contract in April 2022, with RevPAU at c.97% of pre-COVID levels. Since the asset’s launch in Jan’22, Lyf One North registered strong occupancy of 90% in 2Q22, made up primarily of long-stay bookings.
UK	+227%	44 / 144	7%	No COVID-19 measures within the country since Feb’22. 1H 2022 revenue and gross profit increased by 180% and 167% y-o-y respectively, on the back of stronger domestic and international demand following the reopening of borders.Strong pent-up leisure demand supported by a return of events such as the Queen’s Platinum Jubilee Central Weekend. Expect RevPAU recovery traction to continue to surge beyond pre-COVID levels.
US	+257%	/ 207	21%	1H 2022 revenue and gross profit rose 141% and 457% y-o-y respectively due to robust performance of the hotels. Performance was driven primarily by domestic leisure demand and increased booking from corporate travellersART’s 3 New York hotels saw occupancies surge to 80% on strong corporate demand, while achieving pre-pandemic ADR.