AscottREIT – UOBKH

A Pedigree Pan-Asian Hospitality Play

Stable earnings underpinned by diversified asset portfolio. Ascott Residence Trust (ART) owns 37 properties, with 3,550 serviced residence/rental housing units, spread across 11 cities and seven Asia-Pacific countries. Its diversified regional exposure in both emerging and mature markets ensures stable earnings. Compared with hotels, the relatively longer-term leases of ART’s portfolio cushion it against short-term economic shocks. Excluding Revenue Per Available Unit (RevPAU) growth, we expect ART’s existing asset portfolio to offer a floor DPU yield of 5.9% and 6.1% in 2008 and 2009 respectively.

Potential S$300m asset acquisitions in 2008. ART’s ability to execute acquisitions can be seen from the over S$500m worth of acquisitions it has made since Mar 06. With a low gearing of 33.1%, ART can fund yield-accretive acquisitions of up to S$300m through debt (assuming debt/asset ratio of 45.0%) without having to tap the equity market. With RevPAU growth and S$300m worth of asset acquisitions, ART’s DPU yield will improve to 6.5% and 7.4% in 2008 and 2009 respectively .

Pedigree enhanced by CapitaLand’s TAG privatisation. ART has the right of first refusal to its sponsor The Ascott Group’s (TAG) serviced residence/rental housing assets in Asia-Pacific. TAG is the largest serviced residence owner-operator outside of the US. Its extensive exposure in Asia-Pacific provides a potential pipeline for asset injections into ART. The privatisation of TAG by its parent, CapitaLand, will increase the latter’s effective stake in ART from 37.3% to 46.6%. This streamlining of CapitaLand’s hospitality segment will strengthen ART’s importance in the Group and thus boost its potential for value creation for CapitaLand.

Initiate coverage with BUY and target price of S$1.77. Our target price of S$1.77 is on a par with our DCF valuation per share (WACC: 6.9%; terminal growth rate: 2.0%). ART is trading at a 27.7% discount to our target price and a 20.0% discount to ART’s 2007 NAV of S$1.60/share. Our earnings forecasts have not factored in other acquisitions besides the S$300m assumed for 2008. Risks include a sharp economic downturn in Asia, an inability to raise cheap debt, prolonged downturn in equity markets and competition in asset acquisitions.