Ascott Residence Trust - Unrealised potential
Diversified portfolio underpins resilience.
- We maintain our BUY recommendation on Ascott Residence Trust (ART) and TP of S$1.32.
- Amid the volatility in the Singapore hospitality market, we believe ART’s diversified portfolio with serviced residences and rental housing across 14 countries in the Asia Pacific, Europe and the US, offers investors a more resilient DPU outlook.
- ART’s resiliency and cashflow visibility also comes from having 40-50% of its income sourced from master leases and management contracts with minimum guaranteed income.
Value from recent acquisitions/AEIs yet to be fully realised.
- ART has announced c.S$1.2bn worth of acquisitions over the last two years, increasing the value of its assets under management (AUM) by one-third to S$5bn.
- Combined with completed and ongoing asset enhancement initiatives (AEIs), ART should progressively realise benefits over the next few years.
Divestments to strengthen balance sheet.
- ART’s headline gearing of c.41% is slightly elevated and we are mindful of ART’s adjusted gearing (treating 50% of perpetual securities as debt) which stands at 42-44%. However, we understand this is temporary as ART is reviewing its portfolio mix, and looking to divest some of its lower yielding properties.
- We maintain our DCF-based TP and DPU forecasts which have incorporated the realised forex gains in 3Q16 and lower assumed interest rates given prospects of achieving interest savings as ART refinances its borrowings over the next couple of years, partially offset by moderation of average daily rate (ADR) growth in Japan due to potential impact of the recent strengthening of the JPY.
Key Risks to Our View
- Oversupply and forex volatility. The key risk to our call is potential oversupply in ART’s key markets as well as impact from forex volatility.
- These risks are mitigated by ART’s diversified portfolio with no country contributing more than 20% of the group’s net property income.