DBS Group Research has kept its “buy” call and $1.30 target price on Ascott Residence Trust, as its strategy of shifting towards so-called “longer stay” portfolio of properties starts to gain traction.
Longer stay segment, which refers to student accommodation and other longer-term lease properties, make up around 17% of ART’s asset under management. Yet, they contributed around 28% of its gross profit for the quarter.
The bulk of ART’s properties remains serviced apartments where average tenancy tends to be much shorter and which has been hit over the past couple of years because of the pandemic.
In 1QFY2022, the longer stay properties enjoy an occupancy rate of above 95% and a rental growth rate of 5%.
ART plans to further increase the size of longer stary properties from the current range of 15 to 20%, to between 25 and 30%.
However, others have noticed the appeal of longer stay properties too. According to DBS, no thanks to interest from other institutional investors, this property segment has seen a further compression of cap rates.
For example, Blackstone’s privatisation of American Campus Communities (largest student accommodation REIT in the US) was at an exit cap of about low 4%.
Last year, ART’s purpose-built student accommodation assets in the US have seen cap rates down by between 50 to 100bps since their initial acquisition cap rate of 5%.
Having said so, ART is enjoying improvement as a whole. In its recent operational update for 1QFY2022 ended March, ART reported that its portfolio RevPAR was up 22% y-o-y to $67 even with Omicron impact felt towards the earlier part of the quarter.
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The gain was partly driven by strong pent-up demand in March 2022, particularly in UK, US, Japan and Australia.
Other upbeat operating updates include a healthy 85% occupancy enjoyed by ART’s co-living brand property Lyf one-north, which opened just last November.
This quick ramp up is “in line with a tightening market for serviced residences asset offering in Singapore that we have been seeing,” says DBS.
According to DBS, “green shoots” in the coming quarters will include the US properties enjoying a lift in the coming spring break months.
Also, in Japan, leisure demand is returning with ‘Go To Travel’ reintroduced and potential international border reopening, all of which will spell positive news for the top travel destination.
In the UK, ART’s properties are seeing sustained demand for business and corporate bookings.
DBS notes that ART’s gearing remains healthy at 37.8%, and low cost of debt of 1.6%. Its average cost of debt will potentially see an increase of 10 to 15 basis points in the upcoming refinancing exercise.
DBS estimates that for every 10 basis points increase in interest rate will trim 0.5% off distribution per unit.
