Ascott Residence Trust - OCBC Investment 2019-07-04: The ART Of The Deal

ASCOTT RESIDENCE TRUST (SGX:A68U) ASCENDAS HOSPITALITY TRUST (SGX:Q1P)

Ascott Residence Trust - The ART Of The Deal

ASCOTT RESIDENCE TRUST (SGX:A68U) and ASCENDAS HOSPITALITY TRUST (SGX:Q1P) jointly announced a proposed combination, which will result in the combined entity becoming the largest hospitality REIT in Asia Pacific and the seventh largest trust listed on SGX with an asset value of S$7.6b.

The combination will add Ascendas Hospitality Trust’s 14 hotels in Asia Pacific to Ascott Residence Trust's portfolio, creating an enlarged portfolio of 88 properties with more than 16,000 units in 39 cities and 15 countries.
The combination will be effected by way of a trust scheme of arrangement, with Ascott Residence Trust acquiring all the Ascendas Hospitality Trust units for S$0.0543 in cash and 0.7942 Ascott Residence Trust stapled units, per Ascendas Hospitality Trust unit. The total consideration is S$1,235.4m, comprising S$61.8m in cash and 902.8m new Ascott Residence Trust stapled units.

The pro forma DPU for Ascott Residence Trust would have increased 2.5% from 7.16 cents to 7.34 cents and the pro forma DPU for Ascendas Hospitality Trust would have increased 1.8% from 6.03 cents to 6.14 cents. On an adjusted pro forma basis, Ascott Residence Trust’s NAV per unit post-merger is expected to be neutral at S$1.22.
Ascott Residence Trust’s post-merger gearing is expected to be 36.9%, which represents a debt headroom of S$1.0b to the current limit of 45%. We deem the terms of the merger positive for Ascott Residence Trust unitholders.
We estimate that the post-transaction fair value of the merged entity should lie at ~S$1.31 per unit (assuming a 7.5% valuation premium for the merged entity). As we do not cover Ascendas Hospitality Trust, the above calculations are based on the Bloomberg consensus fair value of S$0.98 for Ascendas Hospitality Trust.

We see our 7.5% valuation premium as reasonable given that the merger could facilitate inclusion into the FTSE EPRA Nareit Developed Index. In addition to the valuation premium, we do note that there may be portfolio synergies for the merged entity, notably in terms of the wider range of hospitality brands available to the REIT and the enlarged debt headroom (which would increase options for funding DPU accretive acquisitions).
We would recommend voting in support of the merger at Ascott Residence Trust’s EGM, which is likely to be held in Oct.
After adjustments and with the assumption of a successful merger, we increase our fair value from S$1.25 to S$1.31. Maintain HOLD.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-04

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.31 UP 1.250