ART – OCBC

Divests an asset in Indonesia

Divesting an Indonesian asset. Ascott Residence Trust (ART) plans to divest one of its Indonesian assets, Country Woods. Located in the heart of South Jakarta, the rental housing property comprises of 36 townhouses, 78 bungalows and 137 apartment units. It occupies a net lettable area of 48,490 square meters and has tenure of 20 years expiring on 22 October 2025. The purchaser is an un-related party, identified through a competitive bidding process. The sale is expected to be completed by in 4Q10.

Net gain of S$5.7m. The property will be sold for US$24.18m or S$33.9m. This is 60% higher than the asset’s 30 Jun appraised value of US$15.1m or S$21.2m. Based on 1H10 EBITDA, the implied exit yield of Country Woods is a strong 2.9%. The buyer could potentially be looking to re-convert the asset for residential use, in our view. After accounting for taxes and transaction-related expenses (including early termination of existing contracts), the estimated net gain from the sale is S$5.7m. Proceeds will be used to pare down ART’s debts or for funding future acquisitions.

A positive move. The sale does not come as a surprise as the manager has been open about its intention to divest properties that have exhausted their yield optimization potential under current usage. Country Woods is an ideal “non-core” asset as it is operated as a rental housing property and does not leverage on the Ascott or Somerset brands. ART also noted that Country Woods would “require significant capital expenditure in order for it to compete with the increased competition in the vicinity”. With ongoing refurbishment activity at other properties, we believe this is likely the first of several portfolio adjustments (acquisitions and divestments) as ART focuses on yield & portfolio optimization.

Positive impact to fair value. The impact of the divestment is minimal on our earnings estimates as Country Woods contributed only about S$0.4m or 1% to ART’s 1H10 gross profit. On a pro forma basis, ART estimates that the divestment would have added 1 S-cent to the REIT’s 30-Jun NAV per unit of S$1.38. It would also have added 0.01 S-cent to 1H10 DPU of 3.53 S-cents. Assuming net proceeds are used to pay down debt, we estimate that leverage would fall from 40.7% as of 30 Jun to roughly 39.6%. On that same assumption, our S$1.32 fair value estimate edges up by roughly S$0.01 to S$1.33. Both the price and the choice of asset are quite favorable, in our view. Maintain BUY.