ART – OCBC

Mixed operating performance; DPU sub-expectation

1Q10 in line with our estimates. Ascott Residence Trust (ART) posted S$43.5m in 1Q revenue, up 3.2% YoY but down 5.6% QoQ. Overall RevPAU1 for the quarter was S$120 a day compared to S$120 in 1Q09 (flat) and S$124 in 4Q09 (down 3.2%). Distributable amount for 1Q was S$10.3m, down 5.3% YoY and down 10.9% QoQ. This is equivalent to 1.66 S cents DPU2, 11.3% below than our estimate of 1.87 S cents. However, revenue and gross profit were within 4% of our estimates. The large discrepancy in distributable income was due to one-off variances in the tax line. Ex one-offs, distributable income would be up 2% YoY.

Performance mixed by market. We understand that while occupancies continue to hold, ART has not been able to achieve significant room rate growth (an industry-wide issue). This means that while the top-line is growing, it is not flowing through fully – gross profit margin declined 106 basis points YoY to 46.2%. Performance was also mixed by market – while RevPAUs in Singapore, Australia and the Philippines were up strongly YoY; Indonesia, Vietnam and Japan (serviced residences only) recorded RevPAU declines ranging from -7% to -16.1%.

Guidance cautiously optimistic. The manager said that the “differing pace of economic recovery” in the markets where it operates will “continue to provide income stability” (which we take to mean a net flat to mildly positive performance). ART also said it “remains confident of the longer term growth in the markets in which it operates and the operating performance in 2010 is expected to remain profitable.” ART is currently leveraged at 42.1% debt-to-assets. ART’s manager has previously said it was comfortable going up to 45-50% debtto-assets. Asset works are ongoing in an attempt to optimize the yield of the portfolio. The manager said it was also considering asset divestments and yield accretive acquisitions.

Valuation. We are revising our gross profit margin estimate for FY10 down and our tax estimates for FY10-11 up. Our distributable income estimates consequently fall 6.4% and 3.6% for FY10 and FY11 respectively. This translates to a FY10F yield of 6.4%. We will also keep a careful eye on how actual performance matches up against our RevPAU growth estimates over the next quarter. We revise our fair value estimate down 4.3% to S$1.32 from S$1.38 previously. This still offers an estimated total return of 18.8% and we maintain our BUY rating. Key risks to our thesis are macroeconomic / regional economy risk and a slower-than-expected pick-up in corporate travel.