AscottREIT – CIMB

Changing seasons

• Above expectations. 3Q08 results were in line with consensus estimates but above our expectations due to lower-than-forecast interest expense. DPU of 2.61cts grew 31.2% yoy to form 32% of our forecast of 8.16cts for FY08. Gross revenue of S$53.0m was up 25.3% yoy on double-digit revenue per available unit (REVPAU) growth in Singapore (+31%), Australia (+63%) and China (+55%). YTD DPU forms 87.4% of our full-year estimate, above expectations.

• Slower last quarter guided. While the going was good in 3Q08, management guides that the fourth quarter of the year is typically the weakest. Strong REVPAU growth in China from a surge in average daily rates during the Olympics Games is likely to normalise from now.

• Changes to assumptions. In line with our house view that the US financial crisis could result in a marked slowdown in Asia, we have cut our REVPAU forecasts (a function of occupancy and average daily rates) to reflect up to a 20% decline per annum in the next three years. Separately, we reduce our acquisition assumption for FY08 to S$84m (acquisition of Somerset St Georges Terrace in Perth) from S$364m as we do not expect any acquisitions in the current credit climate. We also lower our cost of debt assumption for ART to 3.5% from 4% for FY08.

• Downgrade to Underperform from Outperform; new target price of S$0.56 (from S$1.45). Following our adjustments, our FY08 DPU estimate increases by 5%, while our FY09-10 estimates decrease by 26-39%. We apply a higher discount rate of 10.5% (previously 8.5%) (risk free rate 5.0%, market equity premium 4.6%, beta of 1.2) to our DDM valuation to reflect increased risks for the short-stay tenures of the hospitality industry (average of eight months for ART’s portfolio) in this climate vs. other property segments (average 3-year leases). Our earnings reductions account for 80% of the change in our target price. Our new target is
S$0.56 (from S$1.45). Downgrade to Underperform in view of the weakening macroeconomic outlook.