Inorganic driven growth
- 3Q14 DPU +14.7% YoY on adjusted basis
- Acquisitions to fuel growth ahead
- Preferred hospitality REIT
3Q14 DPU in-line with our expectations
Ascott Residence Trust (ART) reported a 8.9% YoY increase in its 3Q14 revenue to S$93.7m, but DPU fell 11.0% to 2.11 S cents, as 3Q13 included one-off items amounting to S$1.5m. Adjusting for this and a rights issue exercise, ART’s DPU would have increased 14.7% YoY. Topline growth was largely driven by contribution from acquisitions made in 2014 and organic growth from its existing portfolio to a smaller extent. For 9M14, revenue rose 12.7% to S$262.2m. DPU dipped 14.6%, (but jumped 7.9% after adjusting for one-off items and effects from a rights issue) to 6.04 S cents. This formed 75.5% of our FY14 forecast, and we view this as within our expectations.
Still positive on outlook
Although ART’s RevPAU for its serviced residences declined 4% YoY to S$128 in 3Q14, this was largely due to the acquisitions of two assets in Wuhan and Xi’an, whereby the average daily rates are lower as compared to the tier-1 cities. From a same store perspective, we understand that ART’s RevPAU for its overall portfolio still rose 2% YoY in 3Q14. Looking ahead, management expects its portfolio to remain resilient despite the macroeconomic uncertainties. It has also hedged 70% of its estimated FY14 distribution income denominated in EUR and GBP and ~50% of its JPY exposure for FY14. While ART has yet to put in place FX hedges for its FY15 distribution income, we expect management to pro-actively monitor the situation and enter into forward contracts in the near future.
We incorporate ART’s recent accretive acquisitions in our model, and raise our FY14 and FY15 DPU forecasts by 1.9% and 2.2%, respectively. Our RNAV-derived fair value estimate is thus bumped up from S$1.33 to S$1.37. We reiterate BUY on ART, and recommend the stock as our preferred pick within the hospitality REITs sector. We believe its large, diversified portfolio of serviced residences offers better visibility and stability as compared to hotel assets. ART is also trading at an undemanding forward P/B ratio of 0.9x, while FY14F and FY15F distribution yields are attractive at 6.6% and 7.0%, respectively.