REITs − Singapore - 4Q16 Results Of KREIT (Below), MIT (Above), ART (In Line)
- Ascott REIT (ART)’s results came in within our expectations; maintain BUY with a target price of S$1.30.
- Keppel REIT (KREIT), Mapletree Industrial Trust (MIT) and Ascott REIT (ART) have reported their quarterly results.
Ascott Residence Trust (ART SP/BUY/S$1.185/Target: S$1.30)
- Results in line with expectations; maintain BUY with an unchanged target price of S$1.30, based on a two-stage dividend discount model (required rate of return: 7.7%, terminal growth rate: 1.4%).
- ART reported 4Q16 DPU of 2.04 S cents, -1% yoy due to an enlarged unit base (+7% yoy), as 4Q16 distributable income rose 6% yoy.
- 4Q16 gross revenue and NPI saw slight increases of 6% and 3% yoy respectively, on acquisitions in 2015 and 2016.
- 4Q16 portfolio valuation dipped 1.1% to S$4.5b, mainly attributable to revaluation losses in UK and USA properties from higher property tax due to higher assessment values. The jury is still out on the overall impact, as management is still liaising with the authorities on the tax.
- We also note that slight valuation losses were recorded for ART’s Paris assets due to heightened volatility following the unfortunate terror attacks in Nov 15.
- Concerns in China continue to revolve around Tier-2 cities such as Xian, Wuhan and Shenyang, which face existential supply-side pressure. Management remains confident of fundamentals in Tier 1 Chinese cities. The Singapore market is expected to remain soft, with corporate accommodation budgets still to remain under pressure and lower visibility in forward bookings.
- Oversupply in US is expected to weigh on ART’s Elements Time Square, as about 2,000 rooms should hit the market over the next two years. Post-Brexit referendum UK’s (10% of AUM) operating performance remained stable (occupancy above 80%), with an uptick in corporate demand. Management has opined that its UK operations should stay relatively healthy.
Limited debt headroom implies asset recycling and equity fund raising.
- Limited debt headroom (gearing at 39.8%) implies a likelihood of equity fund raising to finance potential acquisitions.
- We also do not rule out capital recycling through potential divestments of non-core assets, which could include rental housing assets in Japan (six were divested last year), underperforming Tier-2 China assets or even assets in France with expiring master leases.
To support potential acquisitions.
- Ascott Orchard Singapore is on track for delivery in 2H17 (TOP Oct 16). Management had previously highlighted the likelihood of footprint expansion in the US.
- In Europe, we note that the sponsor Ascott Ltd has been acquiring assets in Germany and Paris, which we reckon could require 6-9 months to see performance stabilise before potential injection of these assets into ART.
Master leases expiring end-17.
- The REIT manager has already entered into negotiations for the renewal of four of its 17 master-leased assets in France.
- Given the recent volatility in Europe (Nov 15 terror attacks in Paris), we reckon terms entered into could be less favourable.