Ascott Residence Trust (ART SP) - UOB Kay Hian 2017-04-24: 1Q17 Running To Stand Still

Ascott Residence Trust (ART SP) - UOB Kay Hian 2017-04-24: 1Q17 Running To Stand Still ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust (ART SP) - 1Q17 Running To Stand Still

  • 1Q17 results were in line with our expectation. 
  • Overall RevPAU was up 2% yoy to S$128, mainly attributed to the acquisition of Sheraton Tribeca in 2016. However, on a same store basis, overall RevPAU declined due to lacklustre corporate demand in Singapore and translational impact from the UK. 
  • Maintain HOLD with a lower target price of S$1.15 (previously S$1.20). Entry price: S$1.00.



RESULTS

  • Ascott Residence Trust’s (ART) 1Q17 DPU of 1.51 cents is in line with our expectation, at 23.6% of our full-year forecast. 
  • While gross revenue was up 5% yoy, NPI declined 3% yoy on the back of higher expenses (property tax, ground lease and marketing) at Sheraton Tribeca (acquired last March). 
  • DPU fell 14% yoy due to an enlarged unit base from last year’s private placement and one-off exchange gains in 1Q16. Stripping out the impact of dilution and one-off items, 1Q17 DPU would have been up 4% yoy.
  • 1Q17 overall RevPau rose 2% yoy to S$128, largely attributed to the acquisition of Sheraton Tribeca in Mar 16. On a same-store basis, overall RevPAU was down 2% yoy due to weaker RevPAU in Singapore (reduction in corporate accommodation budgets) and the UK (depreciation in the pound against the Singapore dollar).

Performance by geography. 

  • In local currency terms, RevPAU fell in Singapore (-11% yoy), Japan (-4% yoy), China (-3% yoy) and the US (-2% yoy) in 1Q17, but rose in Vietnam (+10% yoy) and the UK (+4% yoy).

AEI update. 

  • 1Q17 saw the completion of asset enhancement initiatives (AEI) at The Somerset Millennium Makati and Somerset Ho Chi Minh City. The refurbishment of Citadines Barbican London is expected to be completed in 2Q17.


STOCK IMPACT


Management’s outlook. 

  • 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 cities. 
  • The Singapore market is expected to remain soft, with corporate accommodation budgets still under pressure and lower visibility in forward bookings.


Recent acquisitions to contribute to DPU growth in 2018. 

  • Last month, ART proposed to acquire three assets for S$502.2m, placing it closer to its target AUM of S$6b by 2017.
  • We expect a near 16% DPU growth in 2018, bolstered by full-year contributions from these properties.


Active asset recycling strategy. 

  • ART monetises assets for redeployment into higher yielding properties. This is facilitated by healthy investor appetite for rental housing assets. Last week, ART announced the S$154m sale of 18 rental housing assets in Japan. Management had previously announced that it was mulling over the potential divestment of underperforming China assets, especially those in tier-2 cities. 
  • We also do not rule out potential asset recycling of ART’s smaller master-leased assets in France, particularly those outside of Paris.


To support potential acquisitions. 

  • Management had previously highlighted the likelihood of footprint expansion in the US. 
  • In Europe, ART’s sponsor, Ascott Ltd, has been acquiring assets in Germany and Paris, which we reckon could require 6-9 months to see performance stabilise before the potential injection of these assets into ART.

Master leases expiring end-17. 

  • The REIT manager has entered into negotiations for the renewal of 4 of its 17 master-leased assets in France (4.5% of total asset value). Given the recent volatility in Europe (Nov 15 terror attacks and a shooting incident in Paris last week), we reckon that renewal terms entered could be less favourable.


EARNINGS REVISION/RISK

  • We retooled our earnings model to account for the recent divestment of a portfolio of rental housing assets in Japan, lowering 2017-19F DPU estimates by 3%.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a lower target price of S$1.15, based on a two-stage DDM model (required rate of return: 7.7%; terminal growth rate: 1.4%). 
  • Entry price is S$1.00.


SHARE PRICE CATALYST

  • Better-than-expected RevPAU increase from AEIs.
  • Yield-accretive acquisitions.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-24
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.15 Down 1.200



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