AscottREIT – CIMB

More vulnerable

• Met expectations. 4Q08 and full-year DPU numbers were in line with Street and our expectations. Full-year gross revenue of S$192.4m was up 24.2% yoy on strong performances from Singapore (higher daily rates), Australia (Somerset St George’s Terrace, Perth acquired last year), China (higher daily rates during Olympics), Japan (rental housing) and Vietnam (higher daily rates). NPI margins fell qoq from 52.5% to 43.9% on declines in Singapore, Japan and China. Significantly higher property expenses in Singapore and Japan, as well as room-rate declines after the Olympics in China caused the dip in NPI margins.

• REVPAU declined 18.4% qoq. Although REVPAU only dipped 3.6% yoy to S$133, the qoq decline was much starker at 18.4%. Declines were led by ART’s major markets of China (-43%) and Singapore (-12.2%). The average length of stay had also fallen from more than eight months in FY07 to seven months, the result of increased customer preference for shorter leases of under one year.

• Cap rates, asset leverage up. As at 15 Dec 08, ART’s portfolio value declined by S$88.9m, mainly because of lower valuation for its serviced residences in China and Japan. Cap rates expanded by 50-100bp in the latest valuation. With this valuation, asset leverage rose to 38.1%, still healthy.

• Bracing for tough times. Management admits that the challenges ahead are “unprecedented” and expects 2009 to be weaker than 2008. However, capital management remains prudent and the bulk of refinancing (S$382.5m) will only be due in 2011.

• Maintain Underperform and target price of S$0.56. We maintain our DPU estimates for FY09-10 and introduce FY11 forecasts. Forward yields of 14% and a P/BV of 0.32x make the stock cheap vs. the REIT average of 0.41x. Nonetheless, due to the short tenure of serviced residences vs. traditional property segments like industrial and commercial, ART remains more vulnerable to profit volatility in a deteriorating economic environment. Maintain Underperform.