ART – CIMB

Operationally stable

• In line; upgrade to Outperform from Neutral. 1Q10 results were broadly in line with Street and our expectations. Although DPU of 1.66cts forms only 20% of our full-year estimate and 21% of consensus, we consider it to be in line due to seasonal weakness in the first quarter. Operationally, ART remained stable with gross profits improving 1.4% yoy. Our estimates and DDM-based target price of S$1.35 (discount rate 8.3%) are intact. We upgrade ART to Outperform after a 15.5% ytd underperformance. We believe upcoming catalysts also include potential apartment rate increases for Singapore in 2H10. ART offers a prospective return of 19.4% from potential price upside of 12.5% and forward dividend yields of 6.9%. ART is one of the few REITs still trading below book value (0.9x vs. sector average of 1.0x)) while prospective yields are in line with the sector average.

• Operationally stable. Gross profit was S$20.1m, up 1.4% yoy. Strong growth from Australia (+33% due to strong A$ and stronger contributions from high-margin F&B component), China (+17%, attributed to Beijing and Shanghai properties) and the Philippines (+18%, strong corporate demand) was diluted by weakness in Indonesia (-15% due to rectification work for earthquake damage), Japan (-8%, weakening occupancy in rental housing) and Singapore (-3%, additional property tax due to reassessment of property annual values by IRAS). Qoq, there was an 8% decline on seasonal weakness.

• RevPAU flat; Singapore should shine in 3Q. Portfolio RevPAU was S$120/day, flat from one year ago. Although occupancy improved in all countries except Indonesia, average rates remained flat or even declined moderately as there was a differing pace in economic recovery. The Singapore market is expected to grow strongly this year, with 1Q10 REVPAU of S$180/day up 7% yoy mainly thanks to improved occupancy. Other than the one-off property-tax reassessment, ART’s Singapore assets are also being refurbished, which took out 15% from its inventory. Completion is anticipated at end-2Q10. We expect strong apartment rates and an occupancy recovery in 3Q.