AscottREIT – CIMB

Good start to the year

• 1QFY08 results above expectations. Gross revenue of S$45.6m was up 58% yoy on strong REVPAU growth, particularly in the Philippines (+36%) and Singapore (+34%); and contributions from 18 rental housing apartments in Japan acquired last year. Reported revenue was slightly below expectation (22% of full-year forecast) due to a seasonal first-quarter lull in China, the largest income contributor (22% of gross revenue). However, distribution income of S$14.2m and DPU of 2.3cts came in above Street (26% of full year) and our estimates (28% of full year) on lowerthan- expected operating costs and interest expense, and higher non-tax
deductibles.

• Gross operating margins higher than forecast. Gross operating margins were 51%, or 5% pts above our forecast of 46% for 2008. Strong REVPAU growth coupled with the introduction of higher-margin rental housing in Japan and overall cost efficiencies accounted for the improvement.

• Income stream expected to remain stable. Expected slower economies and higher inflation rates in Asia (including Singapore, China, Japan and Vietnam) are likely to affect the hospitality industry in Asia. However, contributions from ART’s portfolio should remain stable, as: 1) 52% of its income comes from the long-stay segment of six months to beyond 12 months; 2) ART has a geographically diverse portfolio which reduces risk concentration; and 3) hotel supply in some Asian markets, particularly Singapore, the Philippines, and Vietnam, is tight. These are ART’s significant markets.

• Forecasts unchanged; maintain Outperform and target price of S$1.74. Our DDM-derived target price (discount 8.4%) stays at S$1.74. At current price levels, ART offers a prospective total return of 45.7% from a 6.5% yield and 39.2% potential price upside.