Ascott Residence Trust - UOB Kay Hian 2015-10-30: Results below expectations

REIT ASCOTT RESIDENCE TRUST A68U.SI

REITs − Singapore 3Q15: Hospitality REITs Results - A Mixed Bag

Results for Ascott REIT and CDL Hospitality came in below our expectations, while Frasers Hospitality Trust surprised on the upside, boosted by contributions from Japan, the UK and Australia.
Geographically-diversified REITs ART and FHT fared better than Singapore-centric CDREIT as room rates in Singapore continued to soften as a result of weak visitor arrivals and sizeable oncoming supply.
Maintain BUY on hospitality REITs as we believe the negatives are more than priced in at these share price levels.

Maintain BUY with a reduced target price of S$1.39 based on two-stage dividend discount model (required rate of return: 7.9% and terminal growth rate: 1.6%).
3Q15 DPU at 2.15 S cents saw a 1.9% yoy. 9M15 core DPU of 6 S cents, adjusted for one-off payment for perps issued in June, came in below expectations, accounting for 70.7% of full-year estimates.
We lower 2015-18 DPU estimates by 1-3% mainly factoring in lower occupancies and average room rates, partially mitigated by contribution from new acquisitions.

Overall RevPAU increased 10% yoy to S$141 underpinned by stronger performance in China, Indonesia and Vietnam. On a same-store basis, excluding acquisitions, RevPAU increased 6% yoy to S$136.
Gearing increased 4.2 ppt qoq to reach 40.0% in the quarter, post completion of acquisitions.
Borrowing costs remained stable at 2.8% (2Q15: 2.9%). The miss in expectations was mainly due to loss of income stemming from the divestment of the Japan rental housing portfolio in September and increased expenses attributable to the recent acquisitions galore.

Serviced residences in Japan, Belgium and Indonesia registered stellar growth, recording RevPau growth of 18%, 15% and 14% yoy respectively. Stronger corporate demand was observed in these geographies, with Japan also seeing increased demand on the leisure front.

Vietnam saw an uplift of 7% yoy in RevPAR mainly attributable to refurbishment done at Somerset Ho Chi Minh. In Spain, Citadines Ramblas Barcelona enjoyed a 3% increase in RevPau after its AEI. Recently renovated Citadines Sainte- Catherine Brussels also made positive contributions in terms of the 15% yoy lift in RevPAU seen in Belgium.

Phased AEI (est cost of S$8.1m) at Citadines Barbican London to commence in 1Q16 with completion slated for 1Q18. AEI at Somerset Xu Hui Shanghai is slated for completion come 3Q16, which should see RevPau in China improve in the coming quarters. Ascott Makati’s refurbishment should see completion by 2Q16.

3Q15 saw the completion of half a billion dollars’ worth of acquisitions inclusive of ART’s foray into the US with the purchase of a prime property in Times Square, New York (S$220.7m, Yield 6.2%) and seven other properties in Melbourne and Osaka (S$298.3m).
ART targets to gradually increase the US exposure to about 15% of assets in the medium term.
Management’s target of S$6b in AUM by 2017 still remains well on track. To date, key markets China, Japan and Singapore make up 17.3%, 15.4% and 12.7% respectively of total portfolio value (S$4.7b).

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-30

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.39 Down 1.41