AscottREIT – CIMB

Stability in extended-stay model

ART’s 3Q revenue grew 11% yoy, mainly contributed by acquisitions as same-store revenue growth remains subdued. While there is stability from the extended-stay model and master leases, we expect to growth from acquisition to slow given gearing of 41%. Remain Neutral.

3Q/9M13 DPU met expectations at 26%/78% of our FY13 forecast and 27%/81% of consensus number. We adjust FY14-15 DPU upwards to account for revenue uplift from asset enhancement initiatives (AEI) completion, slightly offset by the reduced contribution from the potential divestment of Somerset Grand Fortune Garden. Our DDM-based target price (discount rate 8.5%) inches up to S$1.31. Remain Neutral based on lack of growth.

Stability in extended-stay model and master leases

Rental income contributed by more than 12 months stay increased from 17% to 21% qoq due to the acquisition of 11 rental housing in Japan in June 2013. The extended-stay model, coupled with the 31% gross profit from master leases, provides stability but could limit growth for the portfolio in the long term.

Leverage limits acquisition

Asset leverage is currently at 41%. ART’s recently announced sale of Somerset Grand Fortune Garden is estimated to provide c.S$85m of capital, but we estimate leverage to only decrease slightly to 38% upon the sale. This is still high compared to peers of 32%, making acquisitions of c.S$300m per year, such as that in 2011 and 2012, unlikely without further capital raising.

AEI as avenue for growth

ART undertook c.S$24m of AEI in FY13, which has translated into 20-35% higher average daily rate for the renovated apartments. Additional revenue from the refurbished rooms should contribute to FY14 earnings as most AEIs have been completed, but effect on distributions should be less than 1%. With most of the portfolio assets being at least 10-20 years old, we see AEI as the driver for ADR uplifts.