Ascott Residence Trust (ART SP) - Acquisitions Fall Short Of Mitigating Dilutive Rights; Downgrade To HOLD
- We downgrade ART to HOLD (from BUY) with a reduced target of S$1.20 (from S$1.30) on valuation grounds as we factor in the rights issue and acquisitions in Singapore and Germany.
- The announcement removes the equity fund-raising overhang on the stock, providing a S$754.4m debt headroom.
- Management is in advanced negotiations to divest of non-core assets in Japan to re-constitute their portfolio, with the US likely to see the bulk of the re-deployment.
- Ascott Residence Trust (ART) announced a S$442.7m rights issue to acquire Ascott Orchard Singapore (S$405m), Citadines City Centre Frankfurt (S$44.1m) and Citadines Michel Hamburg (S$53.1m).
- Existing unitholders will be offered 481.7m rights units at a ratio of 29 units for every 100 units already held.
- The rights units will be issued at S$0.919 each, which is at a discount of 21.5% to the closing price of S$1.17 as at 6 Mar 17 and a discount of 17.5% to the theoretical ex-rights price.
DPU dilution by 10%.
- The property valuations at an expected EBITDA yield of 4.5% for Ascott Orchard Singapore, 5.4% for Citadines City Centre Frankfurt and 5.4% for Citadines Michel Hamburg are in line with market valuations. However, the transaction will result in a 10.2% dilution after considering the rights issue and contribution from the acquisition.
Equity fund raising overhang removed.
- Gearing will reduce from 39.8% to 37.0% and its debt headroom will increase from S$442.6m to S$754.4m after the rights issue and acquisitions. Management is open to further issuance of perpetual securities given the increased headroom.
- Management is also considering capital recycling through potential divestments of non-core assets. The rental housing assets in Japan (six were divested last year) are under advanced negotiations, while underperforming China assets are also being discussed.
- To support potential acquisitions, 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.
Singapore exposure increased from 12% to 19% post the transaction as a proportion of the asset base.
- Exposure to Germany will increase from 2.6% to 4.4%. ART's asset size will expand to S$5.3b post the transaction. The transaction brings them close to the S$6b target by 2017 they had set earlier.
Secure 4% yield from Ascott Orchard.
- The lease is structured as a fixed lease rental of S$13.2m p.a. and a variable lease rental at 85% of net operating income for a minimum of 5 years and renewable for another 5 years.
- While the expected EBITDA yield from Ascott Orchard on a stabilised basis is 4.5%, management highlighted that the fixed rents, carpark and restaurant rents would alone account for a healthy 4% yield.
- Currently, occupancy is around 35-40%, with rents around S$350 per day.
Extraordinary General Meeting (EOGM) for the two German acquisitions.
- The EOGM will be held only to seek approval for the two German acquisitions with expected EBITDA yield of 5.4%. They have been structured as long-term masterleases (15+5) managed by ART’s parent Ascott.
- Citadines City Centre Frankfurt (S$44.1m) will have a fixed rent of €1.7m p.a and Citadines Michel Hamburg (S$53.1m) will have a fixed rent of €2m p.a.
- We have reduced our 2017-19 DPU estimates by 5-10% to factor in the dilution from the enlarged unit base, partially offset by income stream from acquisitions.
- Downgrade to HOLD with a reduced target price of S$1.20 (from S$1.30) as we factor the 10% DPU dilution from the transaction.
- Our valuation is based on the two-stage dividend discount model (required rate of return: 7.7% and terminal growth rate: 1.7%).
SHARE PRICE CATALYST
- Better-than-expected RevPAU increase from AEIs.
- Yield-accretive acquisitions.