ART – OCBC

2Q10 in line; diversification creates both risks and Opportunities

2Q results in line. Ascott Residence Trust (ART) posted S$44.4m in 2Q revenue, up 3.4% YoY and 2.2% QoQ. Overall RevPAU for the quarter was S$125 compared to S$119 in 2Q09 (+5%) and S$120 in 1Q10 (+4.2%). Distributable amount for 2Q was S$11.6m, up 5% YoY and 12.4% QoQ, as payout in 1Q10 was hit by one-off variances in the tax line. This is equivalent to 1.87 S cents DPU, 3.3% above our estimate of 1.81 S cents. Revenue and gross profit were within 3% of our estimates. For the half-year, ART will pay out a total 3.53 S cents, or an annualized yield of 5.7%.

Asset works and acquisitions. Refurbishment of the two Singapore properties has been completed (the timing of the works was accelerated in response to the strong recovery in the local market). ART has now started refurbishment works on selected properties in Vietnam and China. It continues to explore asset divestments and acquisitions. ART is currently leveraged at 40.7% debt-to-assets, and is comfortable going up to 45% debt-to-assets. The manager noted that any acquisition would be financed using a combination of debt and equity; its target markets include Vietnam, India, Singapore and second-tier cities in China. The manager is also open to exploring any opportunities outside the Pan-Asian region created by the sovereign debt crisis in Europe.

Diversification creates both risks and opportunities. Performance continues to be mixed geographically – markets like Singapore and China are performing strongly but the Philippines and Vietnam recorded RevPAU declines on both a QoQ and YoY basis. ART re-iterated its 1Q10 guidance: the pace of recovery of hospitality demand “differs in [its operating] markets”, providing “income stability”. Right now, the stronger markets are propelling ART forwards: for 2H10, we are estimating a payout of 3.97 S cents (+12.5% HoH). This is driven both by seasonality effects and improving performance in Singapore post-asset works. For FY10 as a whole, we expect YoY DPU growth of 2.5% to 7.5 S cents. Nevertheless, a key risk to our investment thesis is that macroeconomic / regional economy risk tilts the balance between ART’s stronger and weaker markets, impacting DPU growth. This is likely to prove to be a near-to-medium term issue: ART noted it “remains confident of the long term growth in its operating markets.”

Valuations compel us to maintain our BUY rating and S$1.32 fair value [unchanged, 12.5% estimated total return].