Ascott Residence Trust - Maybank Kim Eng 2018-09-14: Diversity And Growth?

ASCOTT RESIDENCE TRUST (SGX:A68U) | SGinvestors.io ASCOTT RESIDENCE TRUST SGX:A68U

Ascott Residence Trust - Diversity And Growth?


Growth-stability balance from diversification…

  • Ascott Residence Trust (ART)’s globally diversified serviced residences offer both stability and growth, in our view. DPUs should be supported by fixed leases in its European markets and mostly variable income in Asia and its recently-acquired US properties.
  • We also see acquisition growth potential from its sponsor’s strong brands and asset pipeline. Nevertheless, global macros will determine returns and risks for this largest hospitality S-REIT.
  • We prefer CDL Hospitality Trusts (SGX:J85) [Rating: BUY; Target Price SGD1.80] and Far East Hospitality Trust (SGX:Q5T) [Rating: BUY; Target Price: SGD0.75] for their greater leverage to an expected Singapore RevPAR rebound.
  • Initiate coverage with HOLD and SGD1.15 DDM-based Target Price (COE 7.9%, LTG 2.0%).



… but growth to trail peers

~ SGinvestors.io ~ Where SG investors share
  • Acquisitions have boosted Ascott Residence Trust (ART)’s global operations with overseas properties now at 81% of its AUM and 88% of gross profits. These are set to grow, as it pushes on with its global ambitions. Gross profits should also be underpinned by both stable income from assets structured under master leases or management contracts with minimum income guarantees; and growth income from management contracts.
  • Ascott Residence Trust’s recent deals in the US have skewed contributions towards growth income, but market RevPARs will need time to rise against a surge in US supply. We forecast FY18-20E DPU growth of 1-2%, behind sector peers’ of 4-8%.
  • ~SGinvestors.io ~ Where SG investors share


Serviced Residences less nimble than hotels in recovery

  • Serviced residences (SRs) in Singapore have suffered in recent years from weak corporate demand and competition, exacerbated by government regulations that reduced the minimum lease for condominiums from six months to three.
  • We think Singapore hotels are better geared to tourism cycles and trade events as hoteliers command strong pricing power amid tight demand, while they also offer short stays, unlike Serviced residences’ minimum 7-day leases. Ascott Residence Trust’s diversification and management contracts, though, have made its assets more sensitive to global RevPAU changes. ~ S G investors.io ~ Where SG investors share


Upside potential from acquisition prospects

  • Ascott Residence Trust has executed well and will likely continue to deliver growth via acquisitions and AEI. These could provide upside to DPU. 
  • Low 35.7% gearing should support a stronger acquisition growth pipeline as its sponsor Ascott has been aggressively adding global assets and brands.
  • ~SGinvestors.io ~ Where SG investors share


Swing Factors 


Upside 

  • Earlier-than-expected pick-up in corporate demand. 
  • Better-than-anticipated RevPAUs. 
  • Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values. 

Downside 

  • Sizeable increases in SR room supply without commensurate growth in demand. 
  • Deterioration in global economy, resulting in declines in RevPAUs. 
  • Significant FX volatility could impede hedging and affect DPUs. 
  • Sharper-than-expected rise in interest rates could increase cost of debt and affect earnings, with higher cost of capital lowering valuations. 


See also the SREIT Hospitality Sector Initiation Report : Singapore REITs - Checking In.




Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-09-14
SGX Stock Analyst Report HOLD Initiate HOLD 1.55 Same 1.55



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