Ascott Residence Trust - DBS Research 2016-03-15: Second bite of the big apple

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ASCOTT RESIDENCE TRUST A68U.SI 

Ascott Residence Trust - Second bite of the big apple 

• Increased US presence with second hotel acquisition in New York for S$218m 
• S$100m equity placement at S$1.055 to fund acquisition 
• 0.3-1.4% uplift to FY16-18F DPU 
• DPU payment of 1.5-1.6 Scts to existing unitholders prior to placement 

Diversified portfolio underpins resilience. 

• 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. 

Crystallising value from recent acquisitions and AEIs.

• ART has announced c.S$1.2bn worth of acquisitions over the last 18 months, increasing total AUM by a third to S$5bn. 
• Combined with completed and ongoing AEIs, 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. 

Assets divestments to strengthen balance sheet. 

• 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. 

Valuation: 

Consistent delivery to close the valuation gap. 

• 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 in the coming year will help close the discount to our TP of S$1.33. 

Key Risks to Our View: 

Oversupply and FX volatility. 

• 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.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-03-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.33 Same 1.33