Ascott Residence Trust - CIMB Research 2017-05-31: Turning Incrementally Positive

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Turning Incrementally Positive

We adjust our FY17F DPU forecast down by 0.1% and raise FY18F-19F DPU by 0.6% to account for three corporate events.
One of the events is ART acquiring its third property in the US, a transaction that we expect to be DPU-accretive and in line with its strategy to scale up in the US.
We deem the property to be a high-quality asset with strategic location.

We understand that ART does not intend to achieve its S$6bn-AUM target for 2017F at any cost and it plans to balance asset growth with DPU-accretive transactions.
We upgrade ART from Reduce to Hold with a higher DDM-based target price, as we believe its acquisitions will be accretive from now on (due to balance sheet reset).

In this note, we factor in three corporate events:
1. the divestment of 18 rental housing properties in Japan;
2. additional one-month contribution from the two serviced residences (SRs) in Germany (acquisition was one month earlier than we expected), and
3. DPU-accretive acquisition of third property in the US.
As a result, we lower FY17F DPU by 0.1% and raise FY18F-19F DPU by 0.6%.
At this juncture, we do not expect the c.S$10.6m gain from divestment of Japanese properties to be distributed to unitholders.

ART is acquiring its third property in the US, the 224-unit DoubleTree by Hilton Hotel New York - Times Square South for US$106m (S$148.4m) or 6% EBITDA yield.
The manager estimates a 0.8% accretion to FY16 proforma DPU, backed by funding mix of 60:40 US$ debt:perpetual securities. Hence, we believe that ART may issue perpetual bonds in the near term.
Post-acquisition, we estimate ART’s aggregate gearing to increase from 35.2% to 36%. We expect the acquisition to be completed at end-Jul.

The freehold property is within walking distance of many Manhattan attractions and a few blocks from the US$30bn Hudson Yards development that is expected to boost the Midtown hospitality micro-market.
The hotel has a strong track record, with high average occupancy of 95.2% in 2013-2016. Although the New York hospitality market is likely to see 5-6% rise in new room supply in next 2-3 years, we think demand will meet incoming supply.
Near-term ADRs may be capped by hoteliers trying to maintain high occupancies.

With this acquisition, ART’s total AUM would amount to c.S$5.3bn, and the US would make up c.12% of the group’s total assets. The main leakage from the property’s EBITDA and distributable income is blended financing cost for debt and perpetual bonds (we assume a 3% borrowing rate for onshore US$ loans) and US withholding tax (we assume at 30% of EBITDA).
Given that demand for yield remains healthy, we expect the pricing of new perpetual securities to match or be lower than ART’s previous two issuances.

We previously thought that ART would seek to expand AUM to S$6bn by end-2017F at any cost. However, we are encouraged to hear that the S$6bn-AUM target is not ART’s only goal and it plans to balance asset growth with DPU-accretive acquisitions.

We upgrade ART to Hold as we expect its acquisitions would likely be accretive from now on (due to balance sheet reset), while the dilutive Ascott Orchard Singapore transaction is likely priced in.
Our DDM TP increases (to S$1.05) as we raise LTG from 1.2% to 1.5%. ART trades close to its 5-year mean at 6.5% FY18F yield and 0.93x FY17F P/BV.
It now trades at 405bp spread vs. 10-year government bonds, above the historical 460bp spread.
Upside/downside risks hinges on acquisitions and macro growth.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-05-31

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