ART – OCBC

Maintain HOLD

Cash call to raise S$199m. Ascott Residence Trust (ART) recently announced its intention to issue 105.3m new units to raise S$199m via an Equity Fund Raising exercise. The new units will increase ART’s existing number of units by about 21%. So far, the placement tranche, which makes up 47% of the new units, has had overwhelming response with demand exceeding supply by 15 times at S$1.90/unit. Similarly, the retail tranche (making up about 8% of new units) was fully taken up via ATM within a day of its launch. The only portion left is the amount allocated to existing unitholders. This portion makes up about 45% of the new units and unit-holders have until 20th Mar to accept the offer. We do not see demand from existing unit-holders as being any less enthusiastic. So the S$199m new equity is almost certainly in the bag.

We expected the cash call. In our Jan 07 report, we had articulated that a cash call from ART was imminent. This was because as of end Dec 06, ART’s gearing of 29% (and with no credit ratings) left not much headroom for more debt. Furthermore, it had already announced S$266m of acquisitions which had yet to be completed. With the expected new equity and the newly assigned credit rating, we estimate that ART could raise a further S$192m worth of debt and still maintain its gearing at a comfortable 45%. (Gearing of 60% is allowable for REIT with credit rating.)

ART targeting S$2.0bn size by end 08. With the announced acquisition so far, we expect ART to reach an asset size of S$1.2bn fairly soon. This is a rapid 32% rise in size since its IPO in 1Q06. Going forward, we do not anticipate this rapid growth rate to slowdown anytime soon. ART has guided for an asset size of S$2.0n by end 2008. There is a good possibility of ART exceeding this and we see a S$2.5bn size as easily achievable with the bulk of acquisitions coming from its parent The Ascott Group.

Revised up fair value to S$1.94 on lesser dilution. In our fair value estimate, we had allowed for ART target size of S$2.5bn. However, with the higher price of the new units, fewer units will be issued to finance its acquisition led growth strategy. This lower cost of equity in turn has a positive impact on our valuation. We have thus marginally adjusted up our fair value estimate from S$1.82 to S$1.94. We maintain our HOLD rating on ART.