ART – OCBC

3Q outperforms expectations

Outperforms expectations. Ascott Residence Trust (ART) posted S$44.4m in 3Q09 revenue, down 16.4% YoY but up 3.3% QoQ. Similarly, gross profit declined 21% YoY but increased 5.6% QoQ to S$22m. Portfolio RevPAU for the quarter was S$124 per day compared to S$163 in 3Q08 (-23.9%) and S$119 in 2Q09 (+4.2%). Results outperformed expectations, with revenue and gross profit beating our estimates by 3.5% and 9.9% respectively. 3Q DPU of 1.92 S cents was 6.9% higher than our estimate of 1.80 S cents. Note that distributions are paid on a half-yearly basis.

Occupancy gains drive RevPAU. At 2Q09 results, we had noted that performance in major markets seemed to be leveling off or recovering slightly. This trend continued in 3Q, with improving occupancy levels driving QoQ increases in RevPAU. Singapore was a star performer with RevPAU up 14.9% QoQ, while China saw a smaller QoQ increase of 6.8%. These two major markets are still off 32-44% from their peaks in 3Q08 (an exceptional Olympics-fueled quarter for China). Japan recorded a 24% QoQ increase in RevPAU, which we understand is due largely to forex effects as well as slight occupancy improvements. RevPAU in the other markets was stable or slightly negative QoQ due primarily to forex and/or seasonal effects.

Guidance hopeful but cautious. The manager said that “the severe challenges posed by the global economic downturn to the hospitality industry have eased”. It guided that while it remains cautious of the pace and extent of the recovery, it is “confident of the longer-term growth in the markets” in which ART operates. It also said it is accelerating asset enhancement plans for selected properties. Our view is that the worst is behind ART – we believe Pan-Asian markets, where ART operates, will continue to be attractive FDI destinations. We think ART may shine in the coming months as corporate spend and travel gradually return. The challenge now is increasing, and sustaining, occupancy at levels that allow for a successful increase in unit rates.

Valuations remain attractive. We have revised our estimates to reflect actual 9M09 figures. Our fair value estimate of S$1.19 (unchanged) is derived by charging a 15% discount to our SOTP value of S$1.40 for ART. Fresh equity could be utilized to support asset enhancement plans and fund acquisitions, but we believe our fair value estimate is covered even when fund-raising risks are quantified. ART has re-rated 10% since our last update in September; we continue to find valuations attractive. Maintain BUY.