Ascott Residence Trust - DBS Research 2019-05-02: Delivering Is Believing


Ascott Residence Trust - Delivering Is Believing

  • ASCOTT RESIDENCE TRUST (SGX:A68U)'s 1Q19 DPU of 1.45 Scts (+7% y-o-y) in line with expectations.
  • Uplift from key markets of Singapore, UK and Japan.
  • Ascott Residence Trust yet to fully deploy proceeds from the sale of Ascott Raffles Place; presents upside to our DPU estimates.
  • Maintain BUY, S$1.35.

What’s New

Strong start to 2019

  • ASCOTT RESIDENCE TRUST (SGX:A68U)'s 1Q19 DPU came in at 1.45 Scts, +7% y-o-y. While this formed just 20.1% of our FY19F DPU, it was within expectations, as 1Q is seasonally the weakest quarter.
  • Apart from the better operating performance, the jump in DPU was also driven by lower financing costs and higher one-off realised exchange gain of S$2.6m from the repayment of foreign currency bank loans with deposits received from the divestment of Ascott Raffles Place in Jan 2019.
  • Excluding the impact of the one-off income in both 1Q19 and 1Q18, Ascott Residence Trust's normalised 1Q19 DPU would have increased 4% y-o-y to 1.33 Scts.

Key growth markets continue to shine

  • Singapore, which represents c.15% of 1Q19 NPI, impressed with NPI growth of 23% y-o-y and 13% q-o-q, as operating performance across its underlying assets continued to strengthen. Ascott Orchard benefited from stronger corporate and leisure demand, resulting in higher variable rent, while lower depreciation expense further enhanced NPI. Contributions from properties under management contracts, Somerset Liang Court and Citadines Mount Sophia, also improved as RevPAU increased 22% on the back of higher market demand.
  • Ascott Residence Trust's UK portfolio (8% of NPI) also delivered firm NPI growth of 8% y-o-y, as RevPAU increased 17% following higher corporate and leisure demand.
  • Australia, which makes up c.9% of NPI, fared better in AUD terms during the quarter as revenue and RevPAU increased 3% and 4% y-o-y respectively, mainly due to better leisure demand at Citadines on Bourke Melbourne. Operating conditions in Perth remain challenging but is expected to stabilise in 2019. Nevertheless, in SGD terms due to the depreciation of the AUD, contribution fell 6% y-o-y.
  • Meanwhile, contributions from Japan (13% of NPI) increased by 7% and 4% y-o-y in SGD and JPY terms respectively, mainly due to an uptick in leisure demand and favourable JPY vs SGD forex environment.
  • Boosted by higher long stay demand and demand from project groups, notwithstanding the weaker RMB, contributions from China (11% of NPI) increased 4% y-o-y.
  • Both revenue and RevPAU for the US portfolio (6% of NPI) declined by 5% y-o-y on the back of ongoing renovations at Element New York Times Square West. However, excluding FRS 116 and straight-line lease adjustments, NPI would have been marginally positive at US$0.5m up from loss of US$0.3m. We note 1Q is the seasonal low for properties in Manhattan which results in minimal profits for the properties.
  • Performance in Vietnam (10% of NPI) remain challenged by increased supply and competition but saw a slight pick-up in top-line due to higher commercial rent. With higher staff cots, NPI dipped 2%.

Ongoing asset enhancement initiatives to contribute positively in the near-term

  • Element New York Times Square West is currently undergoing renovation of its apartment units, lobby and public areas.
  • Renovation of 84 apartment units is also underway at Somerset Grand Citra Jakarta.
  • Both are progressing well and on tract for completion in 2Q19, which bodes well for income from 2H19.

Gearing to fall even lower; borrowing costs improved by 20 bps

  • The repayment of foreign currency bank loans and c.S$135m gains related to the surplus on revaluation of Ascott Raffles Place Singapore ahead of its divestment in May 2019 resulted in lower gearing of 35.7% (1Q19) from 36.7% (4Q18). Likewise, NAV per unit rose to S$1.25 from S$1.22 previously.
  • Excluding the effect of the adoption of FRS 116 leases, borrowing costs improved by 20 bps q-o-q to 2.1% currently. FRS 116 leases effective from 1 January 2019 changes the nature of expenses of Ascott Residence Trust’s portfolio of operating leases and replaces the straight line operating lease expense to changes in fair value of right-of-use assets and interest expense on lease liabilities.

Upside from deploying strong balance sheet

  • In January, Ascott Residence Trust announced the sale of Ascott Raffles Place for S$353m on an exit yield of 2% (to be completed in May) and subsequently announced the acquisition of Felix Hotel, a business hotel near Sydney airport which will be subsequently converted to a Citadines Connect property, for A$60.6m (c.S$58.5m) on an EBITDA yield of over 6%.
  • As we have yet to incorporate the Felix Hotel acquisition and the expected deployment of the remaining c.S$290m of proceeds from the sale of Ascott Raffles Place, there is upside risk to our DPU estimates.

Maintain BUY, Target Price of S$1.35

  • We maintain our BUY call and DCF-based Target Price of S$1.35. The market has been sceptical on Ascott Residence Trust’s ability to deliver, and with a strong start to the year and potential upside to our estimates from deployment of its strong balance sheet, this should help convince investors on the merits of Ascott Residence Trust as an investment.
  • We also believe the successful asset recycling strategy as seen by the sale of Ascott Raffles Place at 64% above book value and deployment of proceeds into a higher yield asset not only demonstrates that Ascott Residence Trust’s book value is conservative but more importantly that Ascott Residence Trust deserves to trade above book as implied by our Target Price.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2019-05-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.350 SAME 1.350