ART – BT

ART buys 28 properties from The Ascott

The $969.6m purchase will boost assets by 1.8 times; analysts surprised by size of transaction

ASCOTT Residence Trust (ART) is buying 28 properties from its sponsor, The Ascott Limited, for $969.6 million, and selling one to the latter for $214 million.

With the purchase, ART’s asset size will grow 1.8 times and its reach will stretch past Asia to Europe. But it will be borrowing more and issuing new units – possibly more than half the existing number in issue – to raise over $560 million for the deal.

The sales proceeds will help Ascott, CapitaLand’s service residence arm, in further expansion. The divestment will bring it a net gain of about $52.1 million.

Analysts had mixed reactions to the announcements yesterday morning, made after CapitaLand and ART asked to halt trading in their counters. Many expected ART to buy assets from Ascott, but not so much at a go. ‘What came as a surprise to us was the size and scale of the transaction,’ said OCBC Investment Research analyst Meenal Kumar.

Several also felt that the acquisition, while good for raising ART’s profile, had little impact on its portfolio yield. The purchase is ‘marginally accretive’ but the equity fund-raising will raise ART’s market capitalisation and put it on the radar of more institutional investors, said CIMB analyst Janice Ding.

According to ART, the assets it is buying have an annualised earnings before interest, taxes, depreciation and amortisation yield of 5.7 per cent, exceeding its existing portfolio’s 5.5 per cent.

For CapitaLand, the sale of the assets could be ‘motivated more by desire to grow ART than maximising profit’, according to Standard Chartered’s Regina Lim and Wong Yan Ling in a note.

With the acquisition, ART’s portfolio will grow to $2.85 billion from $1.59 billion, with properties in 23 cities across 12 countries. The trust will gain exposure to Europe – the region will account for some 45 per cent of its total asset value, up from zero.

Of the 28 service residence properties it is buying, 26 are in Europe, across France, the UK, Germany, Belgium and Spain. Just two are in Asia – Somerset Hoa Binh in Vietnam and Citadines Singapore Mount Sophia. Ascott will continue to manage all these assets.

The performance of service residences in key European cities has been stable, said Chong Kee Hiong, CEO of ART’s manager, at a briefing. He noted that occupancy rates reached 95-97 per cent in the last few years even during the financial crisis.

It has been challenging finding a large chain of properties to buy and future purchases are likely to be piecemeal, he added.

ART will hold an extraordinary general meeting on Sept 9 to seek shareholders’ approval for the acquisition, divestment and issue of new units.

The equity fund-raising – comprising a non-renounceable preferential offering to existing unitholders and a private placement – should be completed by year-end. Ascott will subscribe for new units to maintain its 47.7 per cent stake in ART.

Details have not been firmed up but ART suggested that it might raise $560.6 million from placing out 487.5 million new units at an illustrative price of $1.15 apiece. As at Monday, 619.6 million units of ART were in issue.

The illustrative issue price is 4.2 per cent below ART’s closing price of $1.20 yesterday. The counter lost six cents after trading resumed in the afternoon.

ART will also take on more debt, estimated at $116.3 million. On the whole, it does not expect its gearing of 40.7 per cent as at June 30 to rise.

ART’s sale of Ascott Beijing in China to Ascott will provide another source of funds. Home prices in Beijing have been rising and the 310-unit property at Chaoyang would be worth more in a strata-title sale but such a repositioning is not part of ART’s core business, Mr Chong said.

Ascott will realise the best value for Ascott Beijing even if it means converting the property to another use, said the group’s CEO Lim Ming Yan. It is evaluating options, but is likely to refurbish the building before selling it.

The divestment of assets to ART is in line with Ascott’s strategy to recycle capital for investment. Ascott will receive net cash proceeds of some $332 million after the sale, the purchase of Ascott Beijing, and the new unit subscription. It will have a capacity of over $700 million to fund growth, Mr Lim said.

Ascott said early this month that it aims to grow the number of service residence apartments in its portfolio to 40,000 by 2015, up from some 26,000 now.

It no longer owns assets in Europe with the sale to ART but it still holds the title to around 5,200 units in Asia Pacific. These units, together with new ones it buys, will form ART’s acquisition pipeline.

CapitaLand closed unchanged at $4.05 yesterday.