Ascott Residence Trust - Phillip Securities 2019-07-05: DPU Accretive Deal To Enlarge Asset Base By One-Third

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - DPU Accretive Deal To Enlarge Asset Base By One-Third

Proposed ASCOTT RESIDENCE TRUST (SGX:A68U)-ASCENDAS HOSPITALITY TRUST (SGX:Q1P) merger to be 2.5% DPU accretive and NAV neutral.
Enlarged presence in APAC region - Australia (+9ppts) and Japan (+5ppts). Debt headroom will increase from c.S$850mn to c.S$1bn.
The combined entity will be the largest hospitality trust in APAC and eighth largest trust globally, facilitating index inclusion.

Downgrade to ACCUMULATE due to recent share price appreciation. Target price of $1.36 unchanged.

ASCOTT RESIDENCE TRUST (SGX:A68U) will acquire all the issued and paid-up stapled units in ASCENDAS HOSPITALITY TRUST (SGX:Q1P) for a consideration of S$1.0868 per share. Purchase consideration will be S$0.0543 per share in cash and 0.7942 units of Ascott Residence Trust.
Consideration is based on a gross exchange ratio of 0.836x price to NAV and represents a 7% premium to Ascendas Hospitality Trust’s 12-month VWAP.
Combined entity will have an AUM of S$7.6bn (+33%) and more than 206,000 keys under management across 32 countries.
The proposed merger is subject to shareholder votes at respective EGMs to be convened in October 2019. Both trusts require a 50%+1 vote majority (an additional requirement of ≥ 75% votes for Ascendas Hospitality Trust), from which Ascott Residence Trust and Ascendas Hospitality Trust affiliated unitholders will abstain from voting.

The combination will see the injection of 14 income producing assets into the trust which lends a 2.5% DPU accretion for Ascott Residence Trust unitholders (DPU +1.8% for Ascendas Hospitality Trust).

The diversification, growth and stability story remains intact. 66% of the middle-class population will be represented by Asia and Ascott Residence Trust’s increased presence in APAC (71%) will allow Ascott Residence Trust to capture the growth in disposal income and travel associated with this demographic. The portion of profit sourced from stable lease types (master lease and management contracts with minimum guaranteed income (MCMGI)) will increase by 400bps to 46%.

The enlarged trust will have better pricing power on their cost of borrowing and the increased market capitalisation helps the trust to meet the investable market cap criteria for inclusion into the FTSE Nareit Developed Index. 100% of earning from Ascendas Hospitality Trust assets are derived from development markets, putting Ascott Residence Trust’s earning from developed market post-combination at 82%, well above the 75% minimum for index inclusion. This is a positive externality of the increased size, which adds to the merit of the deal. The free float of the combined entity is expected to increase by c.50%.

These two geographies face substantial room supply coming onto the market in the next three years which will add downward pressure to ADRs. The addition of Ascendas Hospitality Trust’s assets to the portfolio will increase Ascott Residence Trust’s presence from 12 countries to 13 countries but the concentration risk in the top four geographies has increased marginally from 47% to 51%, with greatest exposure to soft markets Australia (18%) and Japan (18%).
All six of the assets in Australia are under management contracts and dependent on the profitability of the hotels. All five hotels in Japan are operating under a master lease and have a minimum base rent with a variable component. Despite the supply coming online, Japan hotels will still stand to reap the potential upside from the 2019 Rugby World Cup and the 2020 Olympics, while remaining protected by fixed rents post 2020.

Immediate DPU accretion is a strong case for the combination of Ascott Residence Trust-Ascendas Hospitality Trust. The combination will result in a more geographically diversified entity, positioned to capture growth in APAC markets. Inclusion in the FTSE Nareit Index will be the cherry on the top.

We downgrade our call to ACCUMULATE due to the recent appreciation in Ascott Residence Trust's share price. This translates to a dividend yield of 5.5% and a FY19e P/NAV of 0.88.
No change in our target price as the transaction is still pending shareholder approval.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2019-07-05

SGX Stock Analyst Report ACCUMULATE DOWNGRADE BUY 1.360 SAME 1.360