Ascott Residence Trust (ART SP) - UOB Kay Hian 2017-07-21: 2Q17 Active Asset Recycling Underway

Ascott Residence Trust (ART SP) - UOB Kay Hian 2017-07-21: 2Q17 Active Asset Recycling Underway ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust (ART SP) - 2Q17 Active Asset Recycling Underway

  • Ascott Residence Trust (ART)'s 2Q17 results exceeded our expectations due to better-than-expected contribution from recent acquisitions. 
  • ART is actively seeking potential acquisition targets in the US, Australia, China, Europe and Vietnam. Management remains unconcerned about the impact of competition from Airbnb from the recently-loosened regulations, noting that their respective markets are disparate. 
  • Maintain HOLD with a higher target price of S$1.18 (previously S$1.17). Entry price: S$1.00.



RESULTS


Results above expectations. 

  • Ascott Residence Trust’s (ART) 2Q17 DPU of 1.84 S cents declined 14% yoy (+22% qoq) largely due to the S$100m private placement.
  • Unitholders also benefitted from a one-off realised forex gain of S$11.9m. Excluding the impact of the dilution and adjusting for one-off items, adjusted 2Q17 DPU would have been up 8% to 2.10 S cents. 
  • Results exceeded our expectations as 1H17 DPU accounted for 54% of our full-year forecast, mainly due to better-than-expected contribution from acquisitions.

Acquisitions offset lost income from divestments. 

  • Despite divestments of properties in China and Japan, the recent acquisition of properties in the US and Germany managed to offset lost income. 2Q17 revenue and gross profit were up 4% yoy to 124m and 2% yoy to 59m, respectively. 
  • Portfolio revenue per available unit rose 3% yoy to S$146, due to the acquisition of Sheraton Tribeca New York Hotel, Citadines City Centre Frankfurt and Citadines Michel Hamburg. 
    • RevPAU was weaker in Japan (-6%) owing to the recent divestments of rental housing properties. 
    • RevPAU in the US declined by 4% due to an influx of hotel rooms in Manhattan. 
    • RevPAU grew by 23% in Vietnam following the refurbishment of Somerset Ho Chi Minh City and greater corporate demand. 
    • RevPAU grew marginally in China and Australia at 1% and -1%, respectively. 
    • RevPAU declined by 5% in Singapore due to the competitive market and subdued demand from O&G and financial sectors.


STOCK IMPACT


US$106m (S$148m) acquisition of DoubleTree property in New York City. 

  • ART acquired their third property in New York with the acquisition of DoubleTree by Hilton Hotel New York – Times Square South. The acquisition price was slightly below the US$109.2m (S$152.9m) valuation. The 224-room property provides a 6% EBITDA yield and a 0.8% DPU accretion.

Active asset recycling strategy. 

  • ART completed the divestment of 18 rental housing assets in Japan for ¥10,338m (S$126.2m), realising a net gain of S$17.2m. 
  • They also announced the Rmb980m (S$198m) divestment of two serviced residence properties in China, booking a net gain of Rmb239m (S$48.3m) The proceeds from the sale are expected to be used to pare down ART’s debts or fund potential acquisitions.

Gearing set to rise. 

  • Gearing for 2Q17 was at 32.4%; however, upon the completion upon the completion of the acquisition of Ascott Orchard Singapore, DoubleTree by Hilton Hotel New York – Times Square South and the divestment of Citadines Biyun Shanghai and Citadines Gaoxin Xi’an, gearing would be approximately 36%.

Impact from Airbnb and Oakwood Premier OUE. 

  • Although regulations imposed on Airbnb by Singaporean regulators have been loosened, management remains unconcerned about the impact by competition from Airbnb, citing that their respective markets are disparate. Management showed more concern for their Ascott Raffles property due to the newly-opened Oakwood Premier OUE serviced residence.
  • Management remained hopeful, however, that their larger rooms and hotel license would allow for greater tenant retention.

Demand-side concerns in certain cities. 

  • Management shared their concerns about properties in cities where demand for serviced residences is highly dependent upon key industries. In particular, management expressed their concerns about tier-2 cities in China, such as Xian, Wuhan and Shenyang, which are tied to the automotive industry.
  • Similar concerns were expressed for Ampang, Malaysia, which is dependent on the O&G industry.

Acquisition outlook. 

  • Management is actively seeking potential acquisition targets in the US, Australia, China (tier-1 cities), Europe (France & Germany) and Vietnam leveraging on parent Ascott Group. 
  • Management noted the difficulty of seeking appropriate assets in China due to their low capitalisation rates.


EARNINGS REVISION/RISK

  • We retooled our earnings model to account for better-than-expected contributions from the recent acquisitions, raising 2017F DPU estimates by 2%.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a higher target price S$1.18 (previous: S$1.17), factoring in the higher DPU. 
  • Our valuation is 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/ 2017-07-21
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.18 Up 1.170



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