ART – DBSV

Quality asset acquisition

• Buying quality property within Shinjuku, Tokyo but minimal impact on overall earnings

• Perceived high gearing vs peers and weaker business travel outlook to weigh on performance

• Yields attractive at 8.6-8.8%; but worsening European outlook could mean potential downside, Downgrade to HOLD, TP cut to $1.13.

Acquiring quality asset in downtown Shinjuku, Tokyo. Ascott REIT has entered into a conditional sale and purchase agreement to acquire a 60% interest in 160-unit Citadines Shinjuku Tokyo from Mitsubishi Estate Co Ltd (MEC). A quality serviced residence with good patronage from corporate/leisure travelers since opening owing to its good location and excellent accessibility to regional subway lines. Purchase consideration amounts to JPY 2.6bn (S$45.7m), implying an initial yield of 4.5%yield. While this is lower compared against our estimated WACC of 7.3% for the REIT, as the acquisition will be fully funded by debt, it should be accretive to earnings. Post acquisition ART’s gearing level is expected to head slightly upwards to 42% (vs 41% previously).

Gearing to head up 42%; declining business travel market likely to continue to weigh on share price performance. The impact of the acquisition on ART’s earnings/assets is minimal. Looking ahead, we believe that the following factors will weigh on share price performance: (i) ART’s higher than average gearing level of 42% vs peers, which we believe is justified given its multi-country exposure. The manager has taken higher debt levels overseas, which act as natural hedges against currency fluctuations and for tax efficiency purposes. We also note that other financial metrics (debt maturity profile, interest coverage ratio) remain healthy. (ii) Expected declining business travel especially in/from Europe, which is likely to limit opportunities to raise rates. However, close to 45% of its earnings are contributed by master leases (to Ascott Limited)/minimum income guarantee structures, which offer downside protection. We reduce our RevPAU expectations slightly to reflect our more moderate outlook, resulting in a 3-4% reduction in our FY12-13F DPU estimates.

Downgrade to HOLD, TP revised to S$1.13. While stock offers a relatively attractive yield of 8.6, there exists potential downside risk in the event of a worsening European crisis, given that 42% of its assets are in Europe. Our TP has been revised to S$1.13 due to lower DPU estimates and higher WACC assumptions for its European exposure.