■ Robust Australian core portfolio performance offset by weaker AUD
■ Absence of cross-currency swap costs and payout of Pullman Cairns disposal gains to drive DPU growth
■ Maintain BUY, TP lowered to S$0.74
Payout ratio reduced to 95%. As expected in the absence of costs associated with the unwinding of cross-currency swaps (S$1.8m in 1Q15) which have negatively impacted DPU over the last year, ASCHT delivered a second consecutive quarter of y-o-y growth in DPU. However, 1Q16 DPU was below expectations, coming in at 1.28 Scts (+3.2% y-o-y) as payout ratio was reduced to 95%. Going forward, to ensure a more sustainable DPU, up to 5% of distributable income will be retained for working capital purposes and to reduce the reliance on debt to fund recurring capex requirements.
Core Australian hotels continue to perform. ASCHT’s core Australian portfolio (55% of 1Q16 NPI) delivered a 9.9% increase in NPI in AUD terms with RevPAR jumping 3.9% to AUD134 (3.3-ppt increase in occupancy to 81.8% partially offset by 0.6% dip in ADR to AUD164). However, due to a weaker AUD, NPI in SGD terms fell 1.6% to S$11.7m. With a softer JPY (-10%) impacting healthy underlying Japanese hotel performance (NPI in JPY terms up 3.1%), overall NPI also dipped 0.9% to S$21.4m.
Improvement expected over the rest of FY16. While ASCHT should continue to face headwinds from a weak AUD and JPY as its FX hedges roll off (ASCHT hedges its income on a 15- month rolling basis), we expect improved DPU over the rest of FY16. This is on account of the absence of costs associated with the unwinding of cross-currency swaps (c.S$6.90m) and the payout of up to S$2m in profits from the recent disposal of Cairns Pullman. In addition, ASCHT’s Australian portfolio should benefit from a seasonal uplift (1Q is usually the weakest) as well as a growing level of tourists and still healthy domestic demand. Furthermore, the Japan operations should benefit from the 13% uplift in base rent starting from 4Q16.
Trim DPU on lower payout. To account for a revised 95% payout ratio, we trimmed our FY15-16F DPU by 5%. We have also lowered our DCF-based TP to S$0.74 from S$0.76. We believe a recovery in DPU following a disappointing last 1.5 years, should act as catalyst to close the 9% discount to our TP. ASCHT also offers investors an attractive 8.3% yield which is the highest in the hospitality space. Maintain BUY.
Interest rate risk. As the US Fed is expected to raise interest rates, ASCHT faces the challenge of higher interest costs. Nevertheless, with c.89% of the group’s debt being on fixed rates, ASCHT is partially insulated over the near term.
FX risks. Significant volatility in AUD and JPY would negatively impact our DPU estimates. However, this risk is tempered by ASCHT entering into 15-month rolling hedges. In addition, we believe a large portion of the FX risk has already been priced in as we have already imputed AUD/SGD and SGD/JPY rates of 1.0 and 90 respectively which are below current spot FX rates.
Supply risk. Any significant increase in the number of hotel rooms without a commensurate growth in demand could limit income growth for the REIT, as hotels may have to lower their room rates in order to remain competitive and maintain high occupancies. (Read Report)