AscottREIT – CIMB

Accretive Dalian acquisition

ART’s plan to acquire a serviced residence in Dalian, China did not come as a surprise to us. The S$118m investment offers an EBITDA yield of 5.5% and will be funded by debt costing 3.3%, making it an accretive investment. We estimate the impact of this deal on our FY14-16 DPU to be 0.6%-1.2%. There should be more acquisitions on the cards given that the amount utilised was only about half of the recent rights issue. We believe any additional

acquisitions should come at higher yields in order to justify the previous fund-raising. We maintain our Hold rating while our DDM-based target price (discounted at 8.5%) rises by 0.8%.

What Happened

ART has entered into a sales and purchase agreement with Winner Sight Investment Ltd, a third-party, to acquire a serviced residence in Dalian, China for a consideration of RMB571m (S$118.6m). The property is located in Jinzhou New District, a key development zone in Dalian, and is the only internationally-branded serviced residence in the region. It will be rebranded as Somerset and operated by Ascott Limited under a management contract.

What We Think

Accretive acquisition. At a 5.5% yield and fully funded by debt costing 3.3%, the acquisition is an accretive one. In operation since 2009, the property is a stabilised asset with ~80% occupancy and more than 80% of customers with length of stay longer than six months. International companies operating in the vicinity offer support to its high occupancy. Rebranding and refurbishment of the common areas can provide some upside to the room rates, albeit a small one, in our view.

More acquisitions should come at higher yields. Gearing remains healthy at 36.3% post the acquisition. Given that the acquisition used up slightly less than half of the rights issue, we expect an additional S$150m-200m worth of acquisitions to come. At our estimated cost of equity of 8.5%, we believe further acquisitions need to come at higher yields in order to justify the previous rights issue.

What You Should Do

Maintain Hold. ART’s FY14 dividend yield of 7.2% is slightly below the peer average of 7.5%.