Ascott Residence Trust - Asset recycling opportunity ahead
- 4Q16 DPU of 2.07 Scts (-1% y-o-y) in line with expectations.
- Normalised DPU down 7% y-o-y due to higher shares base and disposal of some assets.
- Considering sale of low yielding China assets later this year to help fund Ascott Orchard.
Diversified portfolio underpins resilience.
- We maintain our BUY recommendation on Ascott Residence Trust (ART) with revised TP of S$1.28.
- 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 c.S$5bn.
- Combined with completed and ongoing asset enhancement initiatives (AEIs), ART should progressively realise the benefits over the next few years.
Divestments to strengthen balance sheet
- ART’s headline gearing of c.40% 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 to pare down debt and/or also recycle into higher yielding assets.
- To account for higher property taxes in the UK and the US, we lowered our DCF-based TP to S$1.28 from S$1.32.
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.