Ascott Residence Trust - UOB Kay Hian 2019-07-04: Acquisition Of Ascendas Hospitality Trust Enlarges Capacity To Generate Growth

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - Acquisition Of Ascendas Hospitality Trust Enlarges Capacity To Generate Growth

The merger of ASCOTT RESIDENCE TRUST (SGX:A68U) and ASCENDAS HOSPITALITY TRUST (SGX:Q1P) will create Asia Pacific’s largest hospitality trust with assets of S$7.6b.
The acquisition will enlarge Ascott Residence Trust’s capacity to acquire more quality assets and take on more development/conversion projects. Debt headroom has increased by 25% to S$1b. The deal provides DPU accretion of 2.5%.

With enhanced liquidity and concentration in developed markets, Ascott Residence Trust is on course for inclusion into the FTSE EPRA NAREIT Developed Index.
Maintain BUY. Target price: S$1.46.

ASCOTT RESIDENCE TRUST (SGX:A68U) has proposed to acquire all ASCENDAS HOSPITALITY TRUST (SGX:Q1P) stapled units for a total consideration of S$1,235.4m or S$1.0868 per Ascendas Hospitality Trust stapled unit, comprising 5% in cash (S$0.0543 per Ascendas Hospitality Trust stapled unit) and 95% in new Ascott Residence Trust stapled units (Ascendas Hospitality Trust shareholders will get 0.7942 new Ascott Residence Trust stapled units for each Ascendas Hospitality Trust stapled unit).
The exchange ratio of 0.836x for the share swap is based on the respective NAVs for Ascendas Hospitality Trust (S$1.02 as at Mar 19) and Ascott Residence Trust (S$1.22 as at Dec 18).
The offer price of S$1.0868 per Ascendas Hospitality Trust stapled unit is based on Ascott Residence Trust's share price of S$1.30.

Ascott Residence Trust’s total by 33% to S$7.6b. The enlarged size of Regal REIT, is ranked second 2.5x the size of CDL HOSPITALITY TRUSTS (SGX:J85) (ranked 6th).
The acquisition adds 14 Asia Pacific (Singapore Korea: 2 Australia: 6 Japan: 5 hotels), creating an 88 with more than 16,000 units in 3915 countries across Asia Pacific, Europe and the US diversify Ascott Residence Trust’s global forays new gateway cities – Brisbane and Seoul.

The combined entity will see its free float increase by 50% to S$2.4b (exceeding index inclusion threshold of S$1.7b), and EBITDA derived from developed markets expand to 82% (previously: 75%), on a pro-forma basis for 2018. This will further enhance trading liquidity, potentially leading to a positive re-rating of its unit price.

With a larger asset base and pro-forma gearing of 36.9%, debt headroom is expected to grow to S$1.0b for the merged entity with a 45% gearing limit (previous: S$0.8b). Debt headroom is much higher at S$1.8b if leverage limit is lifted to 50%, which is currently being considered under MAS’ industry consultation.

Management expects the acquisition to be DPU accretive (boost 2018 pro-forma DPU by 2.5% to 7.34 S cents) and NAV neutral (NAV unchanged at S$1.22).

The merged entity will see its presence in Asia Pacific strengthen by +11% to account for 71% of portfolio valuation (where demand for business and leisure travel is robust). Freehold properties will also expand by +8% to account for 61% of portfolio valuation. No country contributes more than 20% gross profit for pro-forma 2018.
The merged entity will continue to have a balanced mix of stable and growth income (gross profit breakdown of 54% by Management Contracts, 36% Master Lease, and 10% Management Contracts with Minimum Guaranteed Income).

Maintain BUY. Our target price of S$1.46 is based on DDM (required rate of return: 7.0%, terminal growth: 2.0%).

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-04

SGX Stock Analyst Report BUY MAINTAIN BUY 1.460 SAME 1.460