Ascott Residence Trust - UOB Kay Hian 2018-04-19: 1Q18 ART Below Expectations

ASCOTT RESIDENCE TRUST A68U.SI

REITs – Singapore - 1Q18: ART (Below Expectations)

Ascott Residence Trust (ART)’s 1Q18 results were below expectations, mainly due to dilution from the S$442.7m rights issue to fund acquisitions of Ascott Orchard Singapore and German properties, and lower-than-expected income streams from these assets.
Maintain HOLD and target price of S$1.23.

Maintain HOLD and target price of S$1.23, based on DDM (required rate of return: 7.7%, terminal growth: 2.3%).
Ascott Residence Trust posted 1Q18 DPU of 1.35S cents, down 11% y-o-y and 34% q-o-q. The decline was largely due to an enlarged unit base from the S$442.7m rights issue (481.7m units issued) to mainly fund the acquisitions of Ascott Orchard Singapore and German properties, and lower-than-expected income streams from these assets.
Unitholders’ distribution for 1Q18 also included realised forex gains of S$1.6m arising from the receipt of divestment proceeds and repayment of foreign-currency bank loans with the divestment proceeds.
1Q18 revenue growth was attributed to the additional S$8.3m from the 2017 acquisitions, partially offset by the decrease in revenue of S$4m and S$2.8m from divestments and existing properties respectively.
Results were below our and consensus expectations, with 1Q18 DPU representing 18.6% of full-year forecasts.

Gross profit of S$48.7m in 1Q18 comprised S$19.3m (39% of total gross profit) from serviced residences on Master Leases, S$5.2m (11%) from serviced residences on management contracts with minimum guaranteed income, and S$24.2m (50%) from serviced residences on management contracts.
Belgium, China and UK among the best markets in 4Q17, seeing RevPAU increased 20% y-o-y (due to stronger demand), 4% (divestment of Citadines Biyun Shanghai and Citadines Gaoxin Xi’an which had comparatively lower RevPAU), and 7% (higher leisure demand and increased revenue from refurbished apartments at Citadines Barbican).
The US saw weaker RevPAU (-9%) due to lower RevPAU at DoubleTree by Hilton Hotel New York – Times Square South, ongoing renovation at Sheraton Tribeca New York Hotel, keen competition and new supply.
Other weak markets seeing RevPAR declines included Singapore (-7%) due to weaker corporate demand and competition in the industry, Japan (-7%) due to keen competition, and Malaysia (-6%) due to softer corporate demand and keen competition.

The effective borrowing rate was marginally lower at 2.3% (4Q17: 2.4%) due to refinancing at lower interest rates.

Ascott Residence Trust has 86% of its total borrowings at fixed interest rates (among the highest for SREITs under our coverage), which will cushion the impact of the two more expected Fed rate hikes this year. Management is also in discussions with banks on refinancing debts due this year (ahead of maturities).

Management signalled that they will continue to look for future accretive opportunities in key gateway cities, and at the same time, identify new opportunities to unlock values for higher-yielding assets.
In Jan 18, Ascott Residence Trust also completed the divestment of two properties in China - Citadines Biyun Shanghai and Citadines Gaoxin Xi’an.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-19

SGX Stock Analyst Report HOLD Maintain HOLD 1.230 Same 1.230

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