Ascott Residence Trust - OCBC Investment 2019-06-25: A Smaller Margin Of Safety

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - A Smaller Margin Of Safety

ASCOTT RESIDENCE TRUST (SGX:A68U) has posted total returns of 24.5% since the start of the year, as compared to the FTSE Straits Times Index’s 20.0% and the Straits Times Index’s 10.1%. We had only caught part of the rally – we had downgraded the REIT from Buy to HOLD on 15 Apr 2019 (see report: Ascott Residence Trust - Take A Breather), and it has rallied 8.3% since then. See Ascott Residence Trust share price.
That said, we had previously noted in our 9 May sector report (see report: SG Hospitality Sector - Since Sector Downgrade, Flat To Negative REIT Returns) that we saw the most upside for Ascott Residence Trust out of all the hospitality REITs under our coverage. Indeed, Ascott Residence Trust has outperformed CDL HOSPITALITY TRUSTS (SGX:J85) and FAR EAST HOSPITALITY TRUST (SGX:Q5T) by 9.6% and 8.4% respectively over the same time period. See CDL Hospitality Trusts share price; Far East Hospitality Trust share price.

We believe Ascott Residence Trust’s YTD rally was supported by a flight to defensive safe names and a dovish bias from the Fed.
While we continue to like Ascott Residence Trust for its highly geographically diversified portfolio of high quality assets, we believe valuations are stretched as at 24 Jun’s close. According to Bloomberg consensus, Ascott Residence Trust is trading at a 5.58% blended forward dividend yield, more than 2 standard deviations below its ten-year average.
As at 24 Jun’s close, Ascott Residence Trust is trading at a 5.4% FY19F dividend yield (our own forecast). Gearing stands at 35.7% as at 31 Mar 2019. See Ascott Residence Trust's dividend history.

Given stretched valuations as at 24 Jun’s close, we believe investors in Ascott Residence Trust may find an alternative in KEPPEL DC REIT (SGX:AJBU). See report: Keppel DC REIT - Ready To Fire Up On Inorganic Growth.
Like Ascott Residence Trust, Keppel DC REIT also boasts a quality portfolio of assets and substantial geographical diversification. In addition, we like Keppel DC REIT for its long WALE of 8.0 years and believe that the data centre sector will be more resilient, relative to the serviced residences sector – this is a plus, should the trade war uncertainties persist past President Trump and President Xi’s meeting at G20.
Keppel DC REIT is currently trading at a 4.88% blended forward dividend yield according to Bloomberg consensus, which we believe is an undemanding valuation relative to its risk-profile. See Keppel DC REIT share price; Keppel DC REIT's dividend history.
We maintain HOLD on Ascott Residence Trust with an unchanged value of S$1.25

Deborah Ong OCBC Investment Research | Chu Peng OCBC Investment | https://www.iocbc.com/ 2019-06-25

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.250 SAME 1.250