Ascott Residence Trust - OCBC Investment 2019-11-22: Unlocking Value

ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - Unlocking Value

ASCOTT RESIDENCE TRUST (SGX:A68U) will join the consortium led by CITY DEVELOPMENTS (SGX:C09) and CAPITALAND (SGX:C31) to redevelop Liang Court Site with a partial sale of its 15,170 square metres gross floor area (GFA) for Somerset Liang Court Singapore for S$163.3m to CITY DEVELOPMENTS. The divestment price is 44% above the property’s book value as at 30 Sep 2019 and 138% above ASCOTT RESIDENCE TRUST’s acquisition price in 2006.

Total net gain from the sale and fair value gain from ASCOTT RESIDENCE TRUST’s retained GFA in the land is estimated to be S$84.3m. ASCOTT RESIDENCE TRUST will redevelop the retained GFA of 13,034 square metres into a new Somerset serviced residence with a hotel license using the net proceeds from the partial sale of land.
The consortium which includes CITY DEVELOPMENTS, CAPITALAND, CDL HOSPITALITY TRUSTS (SGX:J85) and ASCOTT RESIDENCE TRUST intends to redevelop the Liang Court Site into an integrated development with a total gross floor area of more than 100,000 square metres, comprising the new Somerset serviced residence with a hotel licence (owned by ASCOTT RESIDENCE TRUST), the New Hotel (owned by CDL HOSPITALITY TRUSTS), two residential towers expected to offer around 700 apartment units (owned by CITY DEVELOPMENTS-CAPITALAND), and a commercial component (owned by CITY DEVELOPMENTS-CAPITALAND).

The new Somerset serviced residence will offer 192 units, comprising 84 studio, and 108 units of 1 or 2 bedroom, with a flexibility to cater the needs of both short-stay and long-stay travellers. The property’s land lease is refreshed from 57 years to 99 years.
Total expected development expenditure is approximately S$300m, with a target EBITDA yield of 4%. The new serviced residence is expected to open in phases from 2H 2024.
Management sees that it is an opportune time to recycle ASCOTT RESIDENCE TRUST’s capital by redeveloping the aging Somerset Liang Court serviced residence which has been in operation for over 35 years and is likely to incur high AEI costs in the future.

Impact on ASCOTT RESIDENCE TRUST’s gearing will be minimal as the redevelopment is mainly funded by the net divestment proceeds. As at 30 September 2019, ASCOTT RESIDENCE TRUST’s gearing was 33% with a debt headroom of about S$1.1b, assuming gearing limit of 45%. However, we note that there will be an income shortfall due to the redevelopment period and DPU is estimated to drop 4.6% after the sale, on a pro forma FY2018 basis.
That said, the net proceeds of the sale could be used for distributions to smoothen DPU volatility in the interim.
We upgrade ASCOTT RESIDENCE TRUST from Hold to BUY, with unchanged FV estimate of S$1.41.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-11-22

SGX Stock Analyst Report BUY UPGRADE HOLD 1.410 SAME 1.410