Staycations may act as wanderlust substitute
DBS Group Research analyst Derek Tan has maintained his “buy” call on Ascott Residence Trust (ART) with a target price of $1.10 following its profit guidance on July 13.
On the back of global travel restrictions and the circuit breaker measures from April to June, which saw the suspension of non–essential services, ART says it expects its distributable income for 1H2020 to be reduced by 55%–
65% y–o–y from $74.6 million in 1H2019, and its distribution per unit
(DPU) to decline by
65%–75% from 3.43 cents in 1H2019.
In the July 13 report, Tan says he is maintaining his full-year estimates for ART’s distributable income and DPU of $140 million and 4.52 cents respectively due to the recovery curve anticipated for 2H2020, even though the figures “may look high for now”.
He adds that the worst is “likely over” for the Trust since April, when 18 of its 88 properties were closed temporarily. On top of that, ART has a 68% and 20% exposure in the Asia Pacific and European markets, where international travel demand is expected to recover ahead of the US.
“We view phased reopening as a positive sign that most ART’s portfolio assets have attained at least a breakeven level of operations and the relaxation of mandatory hotel closures to be a positive sign within the respective markets,” says Tan.
“1H2020 results will likely represent a trough, and we do not see this being extrapolated for the full year,” he adds.
With the inclusion of assets from Ascendas Hospitality Trust, 45% of gross profit on a normalised basis will originate from 35 master leases and seven management contracts with minimum guaranteed income (MCMGI) assets, which will form some level of downside protection.
As such, Tan feels that ART’s master leases should be able to contribute some 1.9 to 2 cents to its overall DPU.
There may be downsides in the near–term due to rental assistance offered to master lessees based on government regulations or goodwill.
Looking ahead, ART may have to rely on staycations as a potential substitute to satisfy pent-up demands for travel due to ongoing international border closures.
However, as ART’s focus is on the service residence segment, staycations may “limit its profitability” from this trend.
Within Singapore, government hotel bookings for stay–home–notice residences may reflect occupancy strength in 2Q2020 but there may be a declining momentum for the rest of the year. —