Ascott Residence Trust - UOB Kay Hian 2016-03-16: Taking Another Bite Of The Big Apple

Ascott Residence Trust - UOB Kay Hian 2016-03-16: Taking Another Bite Of The Big Apple SUNTEC REIT SUNTEC REAL ESTATE INV TRUST T82U.SI 

Ascott Residence Trust (ART SP) - Taking Another Bite Of The Big Apple 

  • We visited the company post its second acquisition in the US, the Sheraton Tribeca New York Hotel. 
  • Management asserted that its business model remains intact, and that the acquisition is a good fit within the serviced residences portfolio. 
  • We remain net neutral on the acquisition and remain wary of competitive pressure from Airbnb. 
  • Maintain BUY. Target price: S$1.39. 


WHAT’S NEW 

  • We visited Ascott Residence Trust (ART) after the announcement of its US$158m (S$218m) acquisition in New York. 


STOCK IMPACT 


 Business model intact. 

  • Management asserted that the acquisition did not represent a departure from its serviced residences. 
  • With non-room operations (ie the gym and restaurant) leased to third-party operators, 97% of earnings would come from room operations, making the profile of the hotel similar to that of serviced residences. 

 Ongoing efforts to muzzle Airbnb. 

  • Dwelling laws in New York prohibit apartment rentals of less than 30 days (unless occupied by permanent inhabitants). 
  • We are heartened that an increasingly hawkish stance on Airbnb has been taken by regulators (including the General Attorney), which prompted the company to release listing data in its defence last December. However, a cursory check on Airbnb listings within the Downtown Manhattan area still reveals over 300 listings, and we opine more could yet be done by the authorities. 

 Potential two-pronged threat in New York. 

  • Given its 4-star competitor set, we opine that the Sheraton Tribeca could could well be susceptible to the formidable threat of Airbnb notwithstanding existing competition from mass/mid-tier hotels. 
  • In addition, wellheeled corporate and leisure visitors with a penchant for luxury are just as likely to frequent luxury 5-star hotels, placing the asset in an unenviable position. 

 S$6b target in AUM expected to be achieved in 2017. 

  • The proposed acquisition is set to raise ART’s AUM from S$4.7b to nearly S$5b. 
  • Management again emphasised that it is well on track to reach its target, especially with the S$400m New Cairnhill Serviced Residences slated for completion next year. 

 Acquisitions expected to be yield-accretive through leverage (~S$135m). 

  • Taking an expected EBITDA yield of 6.8%, we estimate the property's leveraged yield at 12.7% (funded through estimated debt to equity split of 63:37). 
  • Considering US hedge costs (premium in this case), we come to a property hedged yield of 13.4%, translating into overall hedged forward trading yield of 8.8%. This implies a 22bp improvement over ART's forward yield pre-acquisition. 

 Some respite from draw of the bustling city and limited room supply. 

  • Despite our concerns, we note that New York has seen strong visitor arrivals, hitting a record 58.3m tourists in 2015. 
  • In addition, management has guided for limited room supply in the asset's surrounding area of Tribeca (700-800 rooms). 

 Breeding familiarity on the ground. 

  • We reckon the acquisition also serves as a welcome means to deepen knowledge of the local market, and to contribute to economies of scale, as the US still represents an untried market to ART at present. 

 Acquisition in line with management's strategy of scaling up in key US gateway cities. 

  • This acquisition extends ART's footprint in the US to 10% by asset value and is set to increase the portfolio by about 5% to S$5b in asset value. 
  • We understand management intends to further scale up in the US to 20% by asset value (previous guidance: 15%). Should this materialise, we think further acquisitions in New York are likely, given ART’s existing foothold in New York. 
  • However, with gearing set to hit 40.2% post completion of this acquisition, any further expansion will likely entail some degree of equity fund raising. 


EARNINGS REVISION/RISK 

  • We retain our earnings estimates. 

VALUATION/RECOMMENDATION 

  • Maintain BUY and target price S$1.39, based on a two-stage DDM model (required rate of return: 7.9%; terminal growth rate: 1.6%). 
  • The acquisition is in line with our builtin estimates based on management guidance for target AUM. The stock is offering an attractive 2016 yield of 8.2%. 

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/ 2016-03-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.39 Same 1.39


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