Ascott Residence Trust - UOB Kay Hian 2019-04-12: Creating Value By Recycling Capital

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - Creating Value By Recycling Capital

Ascott Residence Trust has been disciplined with recycling capital. It sold Ascott Raffles Place at an attractive price of S$353m (exit yield 2%), realising a divestment gain of S$134m. Proceeds from the divestment were re-deployed for the acquisition of Felix Hotel in Australia (EBITDA yield at above 6%) and its maiden development project lyf one-north in Singapore (yield-on-cost for development at 6%).
Upgrade to BUY. Target price: S$1.46.

Ascott Residence Trust (SGX:A68U) has been disciplined with recycling capital. It has divested Ascott Raffles Place at an exit yield of 2%, while re-investing in Felix Hotel at an EBITDA yield of 6% and development project lyf one-north Singapore at a yield-on-development cost of 6%.

Ascott Residence Trust has entered into an agreement to sell Ascott Raffles Place Singapore, a premier 20-storey serviced residence building with 146 rooms on a 999-year lease tenure. The sale price of S$353.3m represents an attractive exit yield of 2%.
Ascott Residence Trust is expected to realise net gains from the divestment of S$134m. The sale is expected to complete in May 19.

Felix Hotel is a freehold, limited-service business hotel, and is well-positioned to benefit from the growing transient traveller traffic, as well as a significant number of transport and logistics-related national corporate accounts. The acquisition will add 150 rooms, bolstering Ascott Residence Trust’s Australia portfolio to over 900 units across six properties.
In Sydney, Ascott Residence Trust owns another 3 properties, Quest Campbell town, Quest Sydney Olympic Park, and Quest Mascot (Felix Hotel is located adjacent to Quest Mascot). The clustering effect across these Ascott-managed properties, will enable Ascott Residence Trust to enjoy scale and operational efficiency.
The accretive acquisition has an EBITDA yield of over 6%. It will be funded by a combination of bank loans and divestment proceeds. Assuming 100% debt financing, Ascott Residence Trust’s gearing as at 31 Dec 18 will increase marginally from 37.4% (after taking into account funding for lyf one-north Singapore) to 38.2% (before taking into account divestment proceeds of Ascott Raffles Place).

Ascott Residence Trust acquired a 60-year leasehold prime site in Singapore for S$62.4m in Sep 18. It will be developed into a co-living property with 324 units in research and innovation hub, one-north. T
he property named lyf one-north Singapore, targets the millennial segment. There are 400 companies and 800 start-ups located in the vicinity. A tender for the main contract is in progress. The project is scheduled for completion in 2021.
Management’s estimated yield-on-cost for this development is at 6%.

Ascott Residence Trust completed the refurbishments for Ascott Makati, Citadines Arnulfpark Munich, Citadines Trocadéro Paris, Somerset Grand Hanoi and Sheraton Tribeca New York Hotel in 2018. It has started refurbishment works at Somerset Grand Citra Jakarta and Element New York Times Square West, which would be completed in 2019.
According to management, the average daily rates for refurbished properties increased 10-20% due to stronger demand.

Ascott Residence Trust has issued ¥5b 0.971% fixed-rate notes due 2025 in Sep 18 to refinance the ¥5b 2.010% fixed-rate notes due 2018. Thus, interest expense was reduced by 3.1% y-o-y in 4Q18.
About 80% of Ascott Residence Trust’s total borrowings are on fixed interest rates. It has a well-spread debt maturity profile with less than 5% of debt maturing in 2019. Its aggregate leverage was relatively unchanged at 36.7% in 4Q18.

We like Ascott Residence Trust because Ascott, Somerset and Citadines are global brands in the hospitality industry. However, Ascott Residence Trust’s defensive attributes are under appreciated:
1. Geographical diversification. Ascott Residence Trust has a diversified portfolio of 73 properties with 11,430 units in 37 cities spanning over 14 countries. Its eight key markets, namely Australia (8%), China (7%), France (12%), Japan (13%), Singapore (11%), UK (9%), US (16%) and Vietnam (9%), contributed 85% of total gross profit. Thus, there is minimal concentration risk.
2. Some downside protection. 41% of its 4Q18 gross profit comprised stable income from master leases and management contracts minimum guaranteed incomes. The two segments have weighted average tenure of contracts of five years.

We raise our 2019-20 DPU forecasts by 1-6%, factoring in contributions from the Felix Hotel acquisition and Ascott Raffles Place divestment, as well as assumptions on revenue-mix and GOP margins.

Upgrade to BUY and target price of S$1.46, based on DDM (required rate of return: 7.0%, terminal growth: 2.0%).

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-04-12

SGX Stock Analyst Report BUY UPGRADE HOLD 1.46 UP 1.150