ART – Kim Eng

Clearing the financing hurdle

Event

• Ascott Residence Trust (ART) has successfully placed 419.7m new units to CapitaLand and other institutional investors at $1.08/unit. The new units will start trading tomorrow at 2pm. Existing unitholders can subscribe for the preferential offering of new units at $1.07/unit from Friday, on the basis of one new unit for every 10 existing units held. We estimate a yield of 6.6% for FY11F. Reiterate BUY with a reduced target price of $1.38.

Our View

• The private placement was three times subscribed by a good mix of investors from Asia, Australia and Europe. Of the 419.7m private placement new units, 203.2m units were placed to CapitaLand Group in order for it to maintain its 47.7% unitholding in ART.

• As part of this equity fund raising (EFR), another 67.9m preferential new units – at $1.07/unit – will be offered to Singapore‐registered unitholders on a non‐renounceable basis of one new unit for every 10 existing units held. Application for the preferential offering opens on Friday at 9am and closes on 30 September at 5pm via acceptance form and at 9.30pm via ATM.

• The proceeds from the entire EFR will amount to about $526m to be used for defraying the cost of acquiring the 28 properties announced on 20 August. While the yield accretion for FY10F‐11F is marginal, we believe the enlarged portfolio ($2.9b) will enhance ART’s income stability and increase its exposure to more established markets in Europe.

Action & Recommendation

We continue to favour ART for two reasons: 1) its ability to unlock value for its unitholders, which is borne out by its track record of property divestments in Jakarta and Beijing this year, and 2) its strong execution capability as evidenced by its successful EFR and acquisitions. We reiterate our BUY recommendation but lower our target price to $1.38, from $1.45, after revising our earnings estimates.