Ascott Residence Trust - CIMB Research 2017-07-20: One-off FX Gain Props Up 2Q17

ASCOTT RESIDENCE TRUST A68U.SI

Ascott Residence Trust - One-off FX Gain Props Up 2Q17

Ascott Residence Trust (ART)'s 1H17 DPU of 3.36 Scts (-11% yoy) formed 51% of our full-year forecast, which we consider to be above our expectations. 2Q17 DPU of 1.84 Scts was at 28%.
We expect a stronger 2H with additional contributions from DoubleTree Hilton NY and AOS, as well as US seasonality, which is back-end-loaded.

Overall, we continue to see tepid growth for ART. However, we factor in a lower beta to reflect ART’s bond-like stability, resulting in a higher DDM-based Target Price (S$1.14).
Maintain Hold, with projected total returns of c.3%.
Upside risks could include accretive-acquisitions, while downside risks could spring from slower macro growth.

2Q17 DPU of 1.84 Scts (-11% yoy) was ahead of our expectations, due to a one-off S$11.9m realised FX gain arising from the repayment of a foreign currency-denominated loan.
For same-store comparison, 2Q17 DPU would be 2.10 Scts (+8% yoy) if it was adjusted to exclude the FX gain and rights issue effects.
Also ART recorded a revaluation surplus of S$6m, mostly from the higher valuation of properties in Vietnam and UK.

Nonetheless, we were not impressed by 1H17’s operational numbers given the flat yoy gross profit. Even though there has been a yoy improvement in Europe, gross profit remains behind our forecast. 2Q17 portfolio RevPAU grew 3% yoy to S$146.
On a same-store basis, RevPAU was up 2% yoy, driven by Vietnam and Philippines. The manager shared that four master leases in France and one in Singapore are due for renewal towards end-17; no material changes to lease structure are expected.

Under management contracts, Japan, US and Vietnam are the three largest markets by income. On a same-store basis, gross profit for Japan is down 5% yoy due to lower ADR from the strengthening JPY and keen competition.
In the US, tepid growth is expected for 2017 as near-term supply weighs on ADRs. That said, occupancy remains well over 90%.
Vietnam remains robust, recording a 21% yoy growth in gross profit.
In Singapore, the manager has not seen any impact from the reduction of minimum stay in private housing to three months (from six months).

We expect a stronger 2H with the additions DoubleTree Hilton NY and Ascott Orchard Singapore (AOS), which are expected to be completed in Aug and Oct respectively. Also, we note that the US market is back-end-loaded.
We increase our FY17F DPU by 7% to reflect the one-off FX gain. We also factor in the divestments of the two Citadines properties in China, which are expected to be completed by end-17. Together with the divestments in Japan, we estimate a total divestment gain of S$65.5m.
At this juncture, the manager does not have concrete plans to distribute the gains back to unitholders.

As at 30 Jun 2017, gearing stood at 32.4%. Post completion of the above acquisitions, we expect gearing to be 36%.
All-in interest cost for 2Q17 increased 10bp qoq to 2.4%, with 85% of debt hedged on fixed rates. Refinancing of loans that are due in 2017 has been completed.

As gleaned from our forecasts, we continue to see tepid DPU growth for ART. However, we lower our beta (from 0.75x to 0.7x) to reflect ART’s bond-like stability, which clocks up our DDM-TP. Hold maintained with projected total returns of c.3%.
Upside risks could come from accretive acquisitions, especially as we estimate the REIT will have debt headroom of S$350m (assuming 40% gearing). Then again, we also note that the S$6bn asset target by 2017 is no longer a hard target.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-07-20

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