Ascott Residence Trust (ART SP) - UOB Kay Hian 2017-06-01: Third Bite Of The Big Apple

Ascott Residence Trust (ART SP) - UOB Kay Hian 2017-06-01: Third Bite Of The Big Apple ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust (ART SP) - Third Bite Of The Big Apple

  • ART announced yesterday its third New York hotel acquisition for US$106m (S$148.4m), bringing its US exposure to 12.3% by portfolio value (from 9.7%).
  • Ongoing scrutiny on industry disruptor Airbnb in New York is likely to spell some relief for the target asset’s operations. 
  • Maintain HOLD and target price of S$1.17.
  • Entry price: S$1.00.



WHAT'S NEW 

  • Ascott Residence Trust (ART) announced yesterday its third hotel acquisition in New York for US$106.0m (S$148.4m), from an unrelated third-party vendor (Magna Hospitality). Including acquisition fees and other costs, the total cost is US$111.9m (S$156.6m).
  • Doubletree by Hilton-Times Square South is located in midtown Manhattan, and operates at 95.2% occupancy (outperforming peers, according to management). The asset is located near attractions like Times Square, Madison Square Garden, the Empire State Building and Jacob K. Javits Convention Center.


STOCK IMPACT


Yield accretion through use of leverage. 

  • The acquisition is expected to be funded via debt (58%) and proceeds from potential fresh perp issuance (42%). We note that EBITDA yield of the asset is estimated at 6.0%, against ART's forward trading yield of 6.4%.
  • Gearing is expected to hit 36.0% post acquisition (35.2% currently).

Susceptibility from Airbnb moderated by regulatory crackdown. 

  • Management confirmed that the target asset is a 3- to 4-star hotel, with 70-80% of contributions stemming from leisure demand. This potentially places it within industry disruptor Airbnb’s sights. 
  • However, Airbnb’s New York operations could be further curtailed by Mayor Bill de Blasio’s US$2.9m punitive action against illegal short-term apartment rentals below 30 days (announced in Apr 17). According to a spokesperson, Airbnb has removed 4,200 New York listings since 2015.

Acquisition consideration at 3% discount to valuation. 

  • Independent property valuer JLL has determined the target asset’s value at US$109.2m (S$152.9m). This contrasts favourably against the purchase consideration of US$106.0m (S$148.4m). 
  • In line with management's view of the US as a key target market. This is particularly the case for Manhattan in New York, which welcomed a record 60.3m tourists in 2016. The acquisition would serve to extend ART's footprint in the US to 12.3% by asset value (previously 9.7%). 
  • Management had consistently highlighted its intent to further scale up in the US (to approximately 20% by asset value).

More pessimistic outlook on China and Singapore. 

  • Management’s concern for China continues 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.

Active asset recycling strategy. 

  • ART monetises assets for redeployment into higher-yielding properties. This is facilitated by healthy investor appetite for rental housing assets. ART most recently sold 18 rental housing assets in Japan for S$154m.
  • 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 further acquisitions. 

  • Management has consistently maintained its interest in the US, and we would not be surprised to see further expansion, specifically in New York. 
  • In Europe, we note that ART’s sponsor, Ascott Ltd, has been acquiring assets in Germany and Paris, which we reckon could require 6-9 months to see performance stabilises before the potential injection of these assets into ART.


EARNINGS REVISION/RISK

  • We have factored in the financial impact of the acquisition, tweaking our 2017-19 DPU estimates upwards by 0.4-0.7%.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price S$1.17, based on a two-stage DDM model (required rate of return: 7.7%; terminal growth rate: 2.0%). 
  • 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/ 2017-06-01
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.170 Same 1.170



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