Ascott Residence Trust - FY16 underlying DPU down 3% yoy; gearing up for the ‘biggie’ acquisition in 2H17
- FY16 DPU of 8.27 Scts (+3.5%) yoy was slightly ahead of our expectation, at 105% of our full-year forecast. 4Q16 DPU of 2.04 Scts (-1.4% yoy) was at 26%.
- However, FY16 underlying DPU declined 3.6% yoy to 7.78 Scts.
- Drags from China, UK and the Philippines. Bright spots from Japan and Vietnam.
- Potential acquisition of the S$405m Ascott Orchard in 3Q17, which could be accompanied by equity fund raising.
- Hold maintained with a higher DDM-based TP. We increase our FY17-18F DPU by 0.6-1.4% to reflect lower finance expenses and taxes.
FY16 results summary
- FY16 revenue rose 13% yoy, driven by 2015 and 2016 acquisitions. The increase was partially offset by the divestment of six rental housing properties in 3Q15 and lower UK, China and Philippine contributions.
- Portfolio revenue per available unit (RevPAU) rose 5% yoy to S$140. On a same store basis, RevPAU declined 7%.
- FY16 distribution included net realised FX gain of S$8.8m. Adjusting for the FX gain and equity placement, underlying FY16 DPU would have decreased 3.6% yoy to 7.78 Scts.
Divested Fortune Garden; recorded S$8.3m devaluation loss
- During the year, the group more or less divested the 81 units of Fortune Garden Apartments in Beijing. It also recorded S$8.3m in devaluation loss for 2H16.
- The deficit arose from lower valuations for its properties in the UK and the US (due to higher property tax), albeit partially offset by higher valuations for its properties in Japan, Germany and Spain (due to better operating performance).
Drags from China, the UK and the Philippines
- The manager commented that the difference between the Chinese tier 1 and tier 2 cities have become even more pronounced, with cities like Xi’an, Wuhan and Shenyang experiencing greater supply pressures.
- Although the UK has been relatively unaffected by Brexit, contributions to the group's bottomline were affected by the weaker GBP. The Philippines was affected by renovation of Ascott Makati.
- In Singapore, 4Q16 RevPAU declined 5% yoy, in line with weaker corporate demand.
Higher contributions from Japan and Vietnam
- Japan gross profits climbed 20% yoy due to stronger demand from leisure travellers.
- Vietnam earnings were also steady due to healthy occupancies.
- Meanwhile, France was affected slightly by negative indexation. We also understand that four of its master leases in France are up for renewal towards end-17.
- Element New York Times Square was hurt by keen supply, though Sheraton Tribeca continues to do well. The US accounts for 10% of group gross profit in FY16; we think it will continue to scale up.
Gearing up for Ascott Orchard acquisition; Hold maintained
- The group’s target AUM of S$6bn by end-17 is intact. To this end, we believe ART could acquire the S$405m Ascott Orchard in 3Q17.
- With end-16 gearing at 39.8%, we believe ART could tap the equities market and recycle capital (potential divestment of properties in Japan and China) to fund the acquisition.
- We maintain our Hold rating as we forecast a total return of 3.5%.
- We raise our TP (from S$1.10 to S$1.14) as we roll-forward our DDM valuations and increase our FY17-18F DPU by 0.6-1.4%.
- Upside/downside risks hinge on global macro growth and favorable/unfavorable acquisitions.