ART – DBSV

Journey to the West

• It is all about location – a visit to Ascott REIT’s prime properties in Paris/London

• Tapping the low hanging fruits, planned refurbishment to underpin earnings growth

• Maintain BUY and S$1.38 TP

It’s all about location. In our recent site visit to selected Ascott REIT’s serviced residences (or “apart’ hotels”) in Paris/London, we note a distinct feature – properties are strategically positioned in key business districts or major tourist attractions in London and Paris with good access to public transportation (most properties are within walking distance to the Metro in Paris and The Tube in London). Hence, these apart’ hotels attract a sustainable flow of guests – we understand that the Paris/London properties enjoy a healthy annual occupancy rate of between 75-85%.

Upgrading works at selected properties to underpin stronger operational performance. Ascott REIT has embarked on a refurbishment exercise for its European portfolio. We visited selected properties in Paris/London, which are currently undergoing renovation. We understand that Ascott REIT will be able to fetch average room rates in excess of 20% higher when the newly renovated rooms are re-opened, impressive given the competitive landscape in London/Paris. The manager targets an average payback period of 4-5 years on renovation capex spent in London.

DPU Growth of 8% expected. We project Ascott REIT to deliver a DPU growth of 8% in 2011, one of the strongest amongst its SREIT peers. Growth is expected to continue to be driven from a turnaround in its Asian operations, led by Singapore (contributing c19% of EBITDA in 2011) while London properties (29% of European EBITDA, 12% of EBITDA on a portfolio basis) are poised to be the strongest performer after its planned refurbishment exercise towards the run-up of the London Olympics in 2012, on top of a projected +2% adjustment in master leases in FY11.

BUY, DCF-based TP of S$1.38 maintained. Ascott REIT continues to offer an attractive above sector average FY11-12F yield of c7.0%-7.1%, which is unwarranted in our view, given its capable management track record, sponsor links and a portfolio of largely freehold properties. There is potential for further earnings upside if the manager executes on acquisitions.