Ascott Residence Trust - DBS Research 2016-01-06: Diversification breeds strength

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Diversification breeds strength

We maintain our BUY recommendation on ART with S$1.33 TP.
Amid the volatility in the Singapore hospitality market, we believe ART’s diversified portfolio with serviced residences and rental housing located across 14 countries in the Asia Pacific, Europe and US, provides investors with a more resilient DPU.
ART’s resiliency and cashflow visibility also comes from having 40-50% of its income sourced from master leases and management contracts with minimum guaranteed income.

ART has announced c.S$984m worth of acquisitions over the last 18 months, increasing total AUM by c.30% to S$4.6bn. Combined with completed and ongoing AEIs worth c.S$95m, ART should start to fully realise the benefits from these expansion plans over the next few years. This should also offset the impact from a projected increase in borrowing costs.

While ART’s headline gearing of c.40% is comfortable, we are mindful of ART’s adjusted gearing (treating 50% of perpetual securities as debt) which stands at 43-44%. However, we understand this is temporary, as ART is reviewing its portfolio mix and looking to divest some of its lower yielding properties.

Following the disappointment over the impact of the rights issue in 2013 and difficulties faced by some of ART’s Chinese properties on its DPU over the past two years, we believe delivery of a more consistent DPU over the coming year will help close the discount to our revised TP of S$1.33.
We have lowered our DCF-based TP to S$1.33 from S$1.34 after cutting our FY15-17F DPU by 6-9% as we account for weaker-than-expected 3Q15 results.
We also roll forward our valuation to FY16.

The key risk to our call is potential oversupply in ART’s key markets as well as impact from FX volatility. These risks are mitigated by ART’s diversified portfolio with no country contributing more than 20% of group NPI.
In addition, ART has already hedged the majority of its EUR and JPY income this year at above 1.60 and below 88 respectively.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-01-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.33 Down 1.34