ART – OCBC

Investment thesis intact; maintain BUY

4Q10 DPU of 2.16 S-cents. Ascott Residence Trust (ART), one of our 2011 top S-REITs picks, announced a promising set of 4Q10 results on Fri. Its 4Q10 gross revenue of S$72.83m was up 58.1% YoY and 56.7% QoQ. Gross Profit of S$39.3m rose 80% YoY and 86.25% QoQ. The increase in revenue and gross profit were mainly due to the contribution of S$30.3 million and S$19.2 million respectively from the 28 properties acquired by ART on 1 Oct 2010, which offset the decrease in revenue of S$4.6m from the divestment of Ascott Beijing and Country Woods Jakarta. Distributable income rose 108% YoY and 100.3% QoQ to S$23.9m. 4Q10 DPU was up 15.6% YoY and 16.8% QoQ at 2.16 S-cents.

Portfolio Performance. Most of the European acquisitions are on master leases which offer less cash-flows volatility to the trust. Eight out of ART’s 64 properties are also on management contracts with minimum guaranteed income and an average weighted remaining tenure of more than seven years. For 4Q10, 25% of the gross profit was derived from master leases, while 16% was from contracts with guaranteed income. The ensuing income stability (41% of gross profit) helps to improve management’s debt capacity, which stands at 40.3% gearing as of 31 Dec. 4Q10 revenue (excluding insurance claims) increased, as compared to 4Q09, for most markets, except for China, Japan and Philippines. Revenue dropped for China, on the back of lower performance in Tianjin, which was affected by increasing competition. Japan’s revenue declined following the weaker performance from the rental housing properties. In Philippines, the decrease was due to weaker market demand. Elsewhere, revenue bumped up as a result of higher demand for serviced apartments following

stronger economic growth and the increase in RevPAU.

Still compelling. In line with our OVERWEIGHT rating for the Serviced Apartment subsector1 , we think ART will continue to ride on the hospitality recovery cycle, boosted by improving employment, FDI and GDP figures. Going forward, ART will continue to seek yield-accretive acquisitions in Singapore, China, Vietnam and the UK. It will also explore opportunities in new emerging markets. For FY2011, it also expects the Singapore properties to continue to benefit from the increasing demand for serviced apartments as a result of the robust economy and the UK properties to do well in the lead up to the 2012 London Olympics. Our investment thesis on ART is intact, and we believe the manager will continue to work hard to extract value from ART’s expanded portfolio for unitholders. Maintain BUY with a revised fair value of S$1.34 (Total returns of 12.6%)