CapitaLand Ascott Trust: Lodging Recovery Decelerating; More Upside From New French Leases

CapitaLand Ascott Trust’s HMN, or CLAS’, third-quarter 2023 business updates revealed signs that the postcoronavirus travel recovery tailwind is wearing out as cumulative nine-month gross profit year-on-year growth decelerated to 23%, compared with first-half 2023′s 31%. We retain our fair value estimate of SGD 1.30 as the growth deceleration was in line with our expectations because of the higher base effect of the second half of 2022. Based on its last closing price of SGD 0.92, we think the trust is undervalued and trades at an attractive 2024 dividend yield of 7.1%. We continue to like the trust for its high proportion of stable income base that provides income resilience through market cycles and some upside potential in a strong market.

Third-quarter portfolio revenue per average unit, or RevPAU, grew 17% year on year, reaching 102% of pre-COVID-19 levels. All geographies have exceeded its pre-COVID-19 RevPAU except China and Vietnam. While China recovery is hindered by flight capacity constraints, Vietnam’s recovery is lagging as it is heavily reliant on the recovery of China outbound tourism and there are delays in the approval of travel visas. Still, both China and Vietnam posted good growth figures, and we expect them to catch up as China’s airline capacity increases progressively through 2024.

The trust renewed its seven French master leases in October 2023 for a new 12-year term. The renewed leases come with a higher variable rent component of between 20% and 33%, as compared with the original 0% to 10.35%. The fixed rent component will be indexed to the French commercial lease index and automatically adjusted every year. Management estimates that the trust will collect annually 28% more rent, or EUR 1.9 million more, under the new structure. The trust and the lessee will also co-share the capital expenditure of around EUR 10 million. Overall, we are positive on this as it enables the properties to capture greater upside from the travel recovery.