Excerpts from UOBKayHian report

Ascott Residence Trust (SGX: HMN)

• Ascott Residence Trust (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.
• It is 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.

Strong pick-up in demand in countries with large domestic markets

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.

Ascott Residence Trust benefitting from surge in domestic leisure demand in US

Recovery for ART’s three hotels in New York started in Feb 22, driven by domestic leisure travel, which is already near pre-pandemic 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 late-May. 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.

VALUATION/RECOMMENDATION

Maintain BUY. Our target price of S$1.33 is based on DDM (cost of equity: 7.25%, terminal growth: 2.6%).

You can find the full report here and the company website here