ART – OCBC

3Q10 results mostly in line; maintain BUY rating

3QDPU of 1.85 S-cents. Ascott Residence Trust (ART)’s 3Q10 gross revenue of S$46.5m edged up 4.8% YoY and 4.6% QoQ. However, gross profit dropped 4% YoY but rose 1.8% QoQ to S$21.2m. The manager attributed the YoY decline in gross profit to a one-time charge of prior years’ property tax of S$0.3m for an Indonesian property previously not assessed by the tax authority. Excluding further one-off adjustments in both 3Q10 and 3Q09, gross profit would have been S$21.4m and S$20.4m respectively, representing an increase of 5% YoY. The trust also declared 3Q DPU of 1.85 S cents, translating to a drop of 3.7% YoY and 1.1% QoQ. This was largely due to 419.66m new private placement units issued on 22 Sep to fund the acquisition of 28 new properties which was completed on 1 Oct. Recall that ART has previously acquired these service residence properties from its sponsor, comprising 26 in Europe and one each in Singapore and Vietnam for a sale consideration of S$969.6m. If we exclude the new private placement units, 3Q DPU would be 1.93 S cents, representing an increase of 0.5% YoY or 3.2% QoQ.

Advanced Distribution. As a result of the equity fund raising, ART will declare, in lieu of the scheduled distribution, an advanced DPU of 1.74 S cents for the period from 1 Jul to 21 Sep (day immediately prior to the date of private placement). The advanced distribution will be paid out on 19 Nov. As the trust distributes semi-annually, the remaining 3Q10 DPU of 0.11 S cents will be credited into the distributable income from 22 Sep to 31 Dec.

Portfolio Performance. ART’s RevPAU increased 7% YoY in 3Q10, mainly led by RevPAU growth of 37% in Singapore. The better performance in Singapore is mainly due to the successful launch of the refurbished apartment units of Somerset Grand Cairnhill and Somerset Liang Court. RevPAU for Australia, China, Indonesia and The Philippines also increased in 3Q10. We are also seeing better performance in Shanghai arising from World Expo. However, Tianjin’s performance declined due to increased competition and reduction in corporate accommodation budget. Japan is also facing weak market demand and lower profits due to higher repair, maintenance and advertising expenses.

Maintain BUY. Our investment thesis on ART is intact and we look forward to the performance results and revenue contribution of the 28 newly acquired properties in 4Q10. Management has also stated its confidence in delivering the forecasted 4Q DPU of 1.84 S cents as disclosed in the Offer-Information-Statement (13-Sep). Maintain BUY with an unchanged fair-value of S$1.38.