ART – CIMB

Transformational acquisition

• Maintain Outperform. ART is acquiring 28 serviced-residence properties primarily in Europe at an enterprise value of S$1,394.7m from its sponsor, Ascott Group. Separately, it will be divesting Ascott Beijing for S$301.8m. With this, ART’s asset size will almost double to S$2.85bn and its Asian asset allocation will shrink to 55% from 100%. The acquisition will be funded by divestment proceeds, equity fundraising and debt financing. We anticipate moderate DPU dilution of 2-4% for FY11, to be compensated by increased stability for rental income and higher investor interest as the free float would increase by about 73%. However, we are neutral on the acquisitions due to increased forex risks in Europe and uncertainties in the degree of dilution for minority shareholders from the private placement. We maintain our DPU estimates, DDM-based target price of S$1.35 (discount rate 8.3%) and Outperform rating pending an EGM on 9 Sep. More clarity on a hedging of cash flows from Europe and unit issuance could provide catalysts for the stock, in our opinion.

• Expect stable contributions from Europe. Management will be taking on a triple net master lease or minimum rent lease structure for its European portfolio to counter risks of shorter stays in Europe, which are typically under one month. The lease tenures of the acquisitions will range between six and 19 years with the master tenant being ART’s sponsor, the Ascott Group.