With recent acquisitions in Australia, France, Vietnam, Japan and the US, Ascott Residence Trust (ART) is pivoting to longer-stay accommodation. This will improve the REIT’s resilience, says UOB Kay Hian Research analyst Jonathan Koh.
“ART is acquiring three serviced residences in Australia, France and Vietnam; five rental housing properties in Japan and an additional 45% stake in student accommodation The Standard at Columbia in the US for $318.3 million,” writes Koh. “The acquisitions expand ART’s exposure to longer-stay accommodation from 17% to 19% of portfolio valuation and are accretive to 2021 distribution per unit (DPU) by 2.8%.”
In a Sept 26 note, Koh is maintaining “buy” on ART with a higher target price of $1.36 from $1.35 previously. The new target price represents a 24.8% upside.
Among ART’s acquisitions, three are serviced residences: Quest Cannon Hill in Brisbane, Australia, Le Clef Tour Eiffel Paris in France and Somerset Central TD Hai Phong in Hai Phong, Vietnam.
It also includes five rental housing properties in Kyoto, Osaka, Hyogo and Nagoya in Japan; and an additional 45% stake in The Standard at Columbia near the University of South Carolina, which is currently under development and slated for completion in 2QFY2023. This brings ART’s stake in the student accommodation property to 90%.
Koh says the acquisitions deepen ART’s presence in its key markets of Australia, France, Japan, the US and Vietnam. “The nine properties have 1,018 units and expand ART’s total assets by 7.8% to $8.3 billion. Longer-stay accommodation will expand from 17% to 19% of portfolio valuation, bringing ART closer to its target of 25%-30%.”
See also: ART stabilises portfolio with more long-stay properties
Like most student accommodation properties, The Standard at Columbia has an average length of stay of one year, says Koh. The five rental housing properties in Japan have typical lease tenure of two years, he adds.
Serviced residences have healthy occupancies, writes Koh. “The luxurious Le Clef Tour Eiffel Paris has healthy occupancy of 80% and its average daily rate (ADR) was already 30% above pre-pandemic levels as of July It is located near many tourist attractions, such as the Eiffel Tower, Arc de Triomphe and Avenue Champs-Elysees. The property will remain operational during refurbishment, which is targeted for completion by end-2024. Paris will be hosting the Summer Olympics in 2024.”
According to Koh, Quest Cannon Hill’s occupancy is “healthy” at 95%, while Somerset Central TD Hai Phong’s occupancy is over 90%. “The property caters mainly to corporate guests and has an average length of stay of 11 months. Hai Phong is the top destination for foreign direct investments in Vietnam.”
See also: Travel appetite expected to fuel RevPAR recovery
Impact on ART
The acquisitions strengthen ART’s position as the largest hospitality REIT in the Asia Pacific region, writes Koh. The weighted average ebitda yield for the acquired properties was 4.5% in 2021, without contribution from The Standard at Columbia. Ebitda yield would improve to 5.0% on a stabilised basis when The Standard at Columbia is completed and starts contributing.
The acquisition is accretive to 2021 DPU by 2.8%, assuming there is no contribution from The Standard at Columbia, which is currently under development; a funding mix between equity and debt at 46:54; ART’s aggregate leverage edging slightly higher to 38.5%; management expects cost of additional borrowings to be below 1.7%; and the issue price of new units for private placement is assumed at $1.064.
ART has hedged 79% of its borrowings to fixed interest rate. Unfortunately, the Fed hiked the Fed Funds Rate by 75 basis points to 3.00% on Sept 21. “We expect the Fed Funds Rate to hit 4.25% by end-2022. ART’s cost of debt is expected to increase from 1.7% in 2QFY2022 to 2.15% in 2023,” writes Koh.
Koh trims his 2023 DPU forecast by 1.6% after factoring in acquisitions of four rental housing and one student accommodation properties in Japan for $125 million announced in March, and acquisitions of nine properties in Australia, France, Japan, the US and Vietnam for $318 million. He expects distribution yield to improve from 4.9% for 2022 to 5.8% for 2023.
As at 11.55am, units in Ascott Residence Trust are trading 1 cent lower, or 0.92% down, at $1.08.
