Ascott Residence Trust - UOB Kay Hian 2019-11-22: Somerset Liang Court Rejuvenation

ASCOTT RESIDENCE TRUST (SGX:A68U) | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:A68U)

Ascott Residence Trust - Somerset Liang Court Rejuvenation

  • ASCOTT RESIDENCE TRUST (SGX:A68U) has entered into a put-and-call option to partially divest 15,170 sqm of Somerset Liang Court’s GFA. Using the net divestment proceeds (S$163.3m), Ascott Residence Trust will redevelop the retained GFA of 13,034sqm into a new Somerset serviced residence with hotel license, and refreshed tenure of 99 years (from 57 years).
  • The transaction is expected to unlock S$84.3m in gains (comprising S$41.5m in net divestment gain, and S$42.8m in fair value gain from retained GFA).
  • Maintain BUY with an unchanged target of S$1.66.



WHAT’S NEW


Signed a put-and-call option

  • Ascott Residence Trust signed a put-and-call option for sale of trustee share in the land attributable to a 15,169.68 sqm GFA for Somerset Liang Court Singapore for S$163.3m. Using the net proceeds, Ascott Residence Trust will redevelop the retained GFA of 13,034 sqm into a new Somerset serviced residence with a hotel license and refreshed 99-year lease (from 57 years). See Ascott Residence Trust Announcements; Ascott Residence Trust Latest News.
  • The estimated project development expenditure is S$300m (comprising S$140.3m land value, and S$157.3 total redevelopment cost), or S$2,100psf GFA.





STOCK IMPACT


Unlocking S$84.3m in gains from divestment,

  • Unlocking S$84.3m in gains from divestment, which comprises of S$41.5m in net divestment gain and S$42.8m in fair value gain from its retained GFA. The divestment price of S$163.3m is 44% above its book value (and 138% above its acquisition price).

Rejuvenation of ageing property ( > 35 years in operation).

  • Management noted that the product is ageing, and faces competition from newer hotels. The property has enjoyed capital appreciation, and a healthy occupancy of c.90%.

Slated to open in 1H22,

  • Slated to open in 1H22, the new property will offer 192 units, with more efficient layout and room sizes. Over 50% of the units are 1-2 bedroom units, catering to expatriates, and business executives on long stays.
  • With a hotel license, the Somerset property will also have the flexibility to cater to travellers on short stays (vs minimum of 6 nights, under serviced-residence license).

Within the 10% MAS Development limit.

  • Together with the 324-unit lyf one-north Singapore (a co-living property slated to opened in 2021), management noted that Ascott Residence Trust’s development works only accounts for around c.5% of its total deposited property (ie still below the 10% development limit set by MAS).

Minimal impact on gearing.

  • The redevelopment of Somerset serviced residence will be mainly funded by net divestment proceeds. As such, there is minimal impact on Ascott Residence Trust’s gearing.
  • As at 30 Sep 19, Ascott Residence Trust’s gearing stood at 33% with a S$1.1b debt headroom (before reaching the 45% limit).

Pro-Forma financial impact.

  • Management expects the pro-forma FY18 DPU to decline by 4.6% (due to the absence of contributions from Somerset Liang Court), and NAV to increase by 1.6%.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Contributions from yield accretive acquisitions.
  • Contribution from lyf one-north, its maiden development project.
  • Increased contributions from newly refurbished properties.





Loke Peihao UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-22
SGX Stock Analyst Report BUY MAINTAIN BUY 1.660 SAME 1.660



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