ART – OCBC

Still a compelling story

Scope for high yielding acquisitions. Ascott Residence Trust’s (ART) peer CDL-Hospitality Trusts [CDREIT, NOT RATED] announced last week that it intends to acquire five hotels in Australia. The assets were acquired from Tourism Asset Holdings, a private entity that we understand was
previously linked to Australia’s beleaguered Babcock & Brown. The assets were acquired on fairly attractive terms with the purchase price estimated to be at a discount of up to 66% to the current replacement value (including land cost). This deal, in our view, indicates scope for distressed or at least stressed acquisitions in the hospitality space.

Higher leverage than CDREIT not insurmountable to accretion. CDREIT is leveraged at 19.1% debt-to-assets as of Dec-09 and currently plans to fund the purchases using debt alone, taking its leverage to a still healthy 30%. ART, on the other hand, has a different balance sheet profile as it is already leveraged at 41.2% debt-to-assets. ART’s manager said it was comfortable going up to 45-50% debt-to-assets. With the easing of credit conditions and the re-rating of equity markets versus a year ago, we believe ART could make an accretive purchase using a combination of both debt and equity (potentially improving free float). A virtuous cycle of cheap acquisitions at cheaper capital is achievable if the manager maintains its focus on value protection and creation.

Asset enhancement plans in the meantime. Meanwhile, ART is targeting refurbishments of five properties each in 2010 and 2011. This includes Somerset Liang Court and Somerset Grand Cairnhill in Singapore and Somerset Grand Hanoi in Vietnam. These properties were last refurbished 11-13 years ago. ART is planning to spend roughly S$24.5m on the aforementioned three properties and expects payback within five years. The planned works will be funded using a combination of debt and operating cash flows.

Still a compelling story. As mentioned in our last report, we expect a pick-up in RevPAU in Singapore, China and Australia this year itself. We believe ART makes for a compelling earnings recovery story over 2010 and 2011 on the back of increasing business confidence and a revival of corporate travel. ART is currently trading at 0.85x book and a FY10F yield of 7%. We maintain our BUY rating with S$1.38 fair value estimate (28% total return). Key risks to our thesis are a slower-thanexpected global economic recovery and heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.