Ascott Residence Trust - CIMB Research 2017-03-07: Buttressing the balance sheet comes at a price

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - Buttressing the balance sheet comes at a price

Ascott Residence Trust (ART) has launched a fully-underwritten renounceable rights issue at 29 units for every 100 to raise S$442.7m to part fund AOS and two German properties.
The acquisition is dilutive and we cut our FY17F-19F DPU by 14-19%.
Together with quality assets, the key benefits of the entire transaction, in our view, is to enable ART to strengthen and flex its balance sheet.

We downgrade ART from Hold to Reduce. Upside risk to our estimates could be capital recycling which could negate the effects of the negative carry.

ART has launched a fully-underwritten renounceable rights issue at 29 units for every 100 to raise S$442.7m. The rights units will be issued at S$0.919, a 17.5% discount to TERP of S$1.114.
Ascott, which owns 44.2% of ART, has undertaken to fully subscribe its allotment of rights units. The remaining rights units are underwritten by DBS and BNP Paribas.
The first day of “ex-rights” is 10 Mar; rights issue books closure at 14 Mar and close of rights issue on 31 Mar.

86.2% of the proceeds (S$381.6m) will be used to part fund AOS (price tag of S$405m; EBITDA yield of 4.5%).
The property would be master-leased to Ascott for tenure of 5+5 years, at fixed lease rental of S$13.2m p.a. variable lease rental at 85% of net operating income. The rental structure is similar to Ascott Raffles Place’s.
As the property has not stabilised, we assume an initial c.4% yield for FY17F.
Also, we assume the acquisition would be completed by early-Oct 17 though there is a chance of an earlier date.

12.6% of the proceeds (S$56m) will be used to part fund 93% of Citadines Michel Hamburg (property value of S$46.4m; ART's 2nd property in Hamburg) and 93% of Citadines City Centre Frankfurt (property value of S$55.6m; ART's first property in Frankfurt).
Collectively, these properties are accretive at 5.4% EBITDA yield. The 93% ownership is due to tax optimisation. The properties are master leased to Ascott for 15+5 years (100% fixed rent).
We expect the acquisitions to be completed by end-Apr.

We cut our FY17F DPU by 19%, worse than the c.10% decrease experienced for proforma FY16, which was presented in the slides. We think the deviation lies in negative carry as pro forma FY16F assumed that the acquisitions and rights would be completed on 01 Jan.
Meanwhile, we assumed the German properties and AOS would be completed by early-May and -Oct 17 respectively. Also, AOS has not stabilised.

Together with quality assets, the key benefits of the entire transaction, in our view, are to enable ART to strengthen and flex its balance sheet.
Post-completion, we expect gearing to improve to 37% (end-FY16: 39.8%). Assuming a 45% gearing limit, debt headroom will increase by 70% to S$754m. ART would also be able to tap perpetual securities again.
On the asset-side, ART's AUM would increase to S$5.3bn (end-FY16: S$4.5bn). Its market cap will increase to S$2.4bn, improving trading liquidity in the stock.

Incorporating the rights issue and acquisitions, we reduce our FY17F-19F DPU by 14- 19%; and lower our DDM-TP to S$1.00.
With a downside of c.9% (including yield), we downgrade ART from Hold to Reduce.
Upside risks to our estimates could be capital recycling (divestment of assets in Japan and China to fund higher yielding assets) which could negate the effects of the negative carry.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-03-07

CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 1.00 Down 1.140