ART – CIMB

Global headwinds remain

We returned from a non-deal roadshow more positive on the stock after gaining more clarity on growth potential via asset enhancements and acquisitions. That said, we continue to expect macro headwinds to cap same-store growth and see forex volatility as an overhang.

We revise our assumptions for long-term and AEI-led RevPau growth, and factor in S$100m in acquisitions in 2013/14, adjusting our DPU accordingly. DDM-based target price (8.5% discount rate) also rises. As the stock has done well YTD, we remain Neutral on the lack of strong catalysts.

Allaying investor concerns

Investor concerns were precipitated by the REIT's wide geographic reach. Global outlook was a key concern, with queries targeted at its European portfolio as well as Asia growth opportunities. Concerns were slightly allayed by the nature of the asset class (serviced residence vs. hotels) and structure of leases. Management targets long-staying corporate travellers vs. a more volatile tourist segment. Tourist exposure is limited to 10-20% in Asia and 50% in Europe, with average length of stay at 5-6 months in Asia and <1 month in Europe. Potential earnings volatility in Europe is minimised by master leases and minimum income terms, providing downside protection on >40% of portfolio earnings.

Next phase of growth

With the renovation cycle for serviced residences at 8-10 years, we see AEI potential for older assets. The UK's Citadines Prestige Trafalgar Square, which was recently renovated and rebranded, saw a 30-40% uplift in room rates. Ascott Jakarta is next in line, with expected completion in 1Q13. Management expects a 10-15% average increase in room rates post-AEI. Acquisitions will still focus on Asia (e.g. China, India, Vietnam), through 3rd party and sponsor acquisitions, with the latter seeing S$2bn-2.5bn of assets completing over the next few years. Management will maintain 65:35 Asia/Europe exposure.

Macros still a concern

Macro headwinds are our key concern, as we see growth on 60% of portfolio on management contracts (though limited to Pan Asia exposure) largely capped. Forex volatility is also a worry. We take comfort in recent renewed optimism on ECB action, but remain sceptical on its sustainability. Management caveats it might hedge the Euro depending on conditions.