ASCENDAS HOSPITALITY TRUST (SGX:Q1P)
Ascendas Hospitality Trust - A Bigger New Home
- Proposed merger with Ascott Residence Trust to allow Ascendas Hospitality Trust unitholders the opportunity to swap interest in a mid-cap trust for an enlarged hospitality trust with greater scale.
- Clear benefits from merger should compel Ascendas Hospitality Trust unitholders to accept offer.
- Ascendas Hospitality Trust to track Ascott Residence Trust’s share price from here, thus our revised Target Price of S$1.21 is pegged to our Ascott Residence Trust Target Price of S$1.45.
Accept merger offer to gain exposure to largest Asia Pacific hospitality trust.
- We recommend ASCENDAS HOSPITALITY TRUST (SGX:Q1P) unitholders accept the offer by ASCOTT RESIDENCE TRUST (SGX:A68U) to merge the two hospitality trusts. The merger enables Ascendas Hospitality Trust’s unitholders to swap their interest in a mid-cap trust for an enlarged Ascott Residence Trust which will be the largest hospitality trust in Asia Pacific and the 10th largest S-REIT (by market capitalization) and associated benefits from a larger platform with scale.
- Our revised Target Price of S$1.21 is now pegged to our Ascott Residence Trust's Target Price of S$1.45 and the merger terms (each Ascendas Hospitality Trust unit will receive S$0.0543 in cash and 0.7942 Ascott Residence Trust units), as we believe Ascendas Hospitality Trust will largely track Ascott Residence Trust’s share price going forward.
Benefits to be unlocked with merger.
- We believe the merger of Ascendas Hospitality Trust and Ascott Residence Trust will enable Ascendas Hospitality Trust unitholders to benefit from a higher DPU. Based on Ascendas Hospitality Trust’s estimates, proforma DPU is expected to increase by 1.8%. Furthermore, unitholders will hold a stake in a trust with a significantly larger free float (S$2.4bn versus S$0.7bn previously).
- This greater free float should enable the enlarged Ascott Residence Trust to be included in major property indexes, which could result in greater investor interest, fund flows and tighter yields. Finally, unitholders will gain exposure to a globally diversified portfolio which should provide a more stable DPU profile.
Gaining scale for acquisitions.
- By being part of an enlarged trust and Ascott’s global hospitality platform, Ascendas Hospitality Trust in effect is gaining the necessary scale to pursue acquisitions. Previously, Ascendas Hospitality Trust’s ability to grow its DPU via an inorganic strategy was hampered by its high trading yield and mid-cap status.
WHAT’S NEW - Merger with Ascott Residence Trust a positive development
Ascott Residence Trust to acquire Ascendas Hospitality Trust for S$1.0868 per unit
- Ascott Residence Trust and Ascendas Hospitality Trust have announced a merger between the two trusts to create the largest hospitality trust in the Asia Pacific and eighth largest globally. Ascott Residence Trust will also become the tenth largest S-REIT. Total assets under management (AUM) for Ascott Residence Trust will increase by a third to S$7.6bn from S$5.7bn.
- By way of a trust scheme of arrangement, Ascott Residence Trust will acquire Ascendas Hospitality Trust’s units for S$1.0868 per unit comprising S$0.0543 in cash and 0.7942 Ascott Residence Trust units at a price of S$1.30. This compares against Ascendas Hospitality Trust’s closing price of S$0.975 before the announcement and NAV per unit of S$1.02. Ascott Residence Trust’s pre-announcement price was S$1.31.
- The consideration is based on a gross exchange ratio of 0.836x, based on Ascendas Hospitality Trust and Ascott Residence Trust’s audited NAV per unit which stood at S$1.02 and S$1.22 respectively as at 31 March 2019.
- Based on Ascott Residence Trust’s calculations, they estimate a 2.5% accretion to Ascott Residence Trust’s proforma DPU with a neutral impact on its NAV per unit. For Ascendas Hospitality Trust, the transaction is expected to be 1.8% accretive to its proforma DPU.
- Post merger, earnings from developed markets are expected to increase to c.82% which will facilitate a potential inclusion of Ascott Residence Trust into the FSTE EPRA NAREIT Developed Index. This may result in greater investor interest, higher trading liquidity and compression in trading yields. Currently, 75% and 100% of Ascott Residence Trust’s and Ascendas Hospitality Trust’s EBITDA are from developed markets. In addition, Ascott Residence Trust’s free float is expected to increase from c.S$1.6bn to S$2.4bn which is above the S$1.7bn threshold for index inclusion.
- Proforma gearing is expected to settle at around 36.9%, which provides c.S$1bn of debt headroom assuming a 45% gearing. As at 31 March 2019, Ascott Residence Trust and Ascendas Hospitality Trust’s gearing stood at 35.7% and 33.2% respectively.
- The proposed merger is expected to be completed in December 2019, with Ascott Residence Trust and Ascendas Hospitality Trust’s EGM’s to be held in October 2019.
Positive development for ASCHT unitholders
- For Ascendas Hospitality Trust’s unitholders, we as they stand to gain a in an enlarged swapping a stake in trust. Ascendas Hospitality Trust struggled to gain given its relatively cap and Australia and Japan which understanding. These past have also resulted in Ascendas Hospitality Trust having capital, making it acquisitions. The merged Ascott Residence Trust/Ascendas Hospitality Trust may high cost of capital especially impact from inclusion.
- Furthermore, based on Ascendas Hospitality Trust’s estimates, the is expected to higher proforma is likely to be warmly unitholders.
- Near pressures in Sydney, Melbourne and Osaka, bulk of Ascendas Hospitality Trust’s potential volatility in DPU stake in the enlarged Ascott Residence Trust. The merged diversified portfolio with no market of the total. Ascendas Hospitality Trust unitholders will move 14 hotels to 88 properties in 15 countries covering more than 15 brands.
Accept merger offer from Ascott Residence Trust
- Given the clear benefits from the proposed merger with Ascott Residence Trust, we recommend Ascendas Hospitality Trust unitholders accept the offer from Ascott Residence Trust.
- Thus, we now peg our Ascendas Hospitality Trust Target Price to the merger terms and our Ascott Residence Trust Target Price of S$1.45. Our revised Target Price now stands at S$1.21 versus S$0.98 previously and we maintain our BUY call.
- FY19 DPU excluding capital distributions was below expectations due to the weaker-than-expected performance from Australia and Japan. This resulted in our FY19-21F DPU being cut by 2-3%. However, we believe the market will largely ignore this weak operating performance but instead see Ascendas Hospitality Trust tracking Ascott Residence Trust’s share price.
- For new investors looking at Ascendas Hospitality Trust, we believe at current levels, Ascendas Hospitality Trust provides an attractive entry point into an enlarged Ascott Residence Trust.
Mervin SONG CFA
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2019-07-04
SGX Stock
Analyst Report
1.21
UP
0.980
