AscottREIT – CIMB

Investment summary

• Good exposure to high-growth Asian hospitality markets. ART is a serviced residence real estate investment trust focusing on serviced residences and rental housing markets in Asia. With strong FDI inflows into the region and growing interest in Asia as a new hub for business, leisure and events, demand for serviced residences should be well supported.

• Balanced portfolio reduces seasonal fluctuations. The length of stay at ART’s properties is above the industry average, given ART’s target market of business and leisure travellers, as well as residential tenants. This largely reduces the earnings fluctuations commonly seen in the short-stay hospitality sector.

• Strong sponsor to aid acquisitions. ART is supported by a strong sponsor, The Ascott Group, which has 11,515 serviced residence units and rental housing units (including properties managed, leased, partially or wholly-owned by Ascott) which could be available for injection into ART.

• Low asset leverage positive in current market. ART’s asset leverage as at end-2007 was 33.1%, below its long-term gearing target of 45% and well below the regulatory limit of 60%. This would enable it to achieve its S$2bn asset target by end-2008 through acquisitions without the need to seek funding in capital markets.

• 9% DPU CAGR for 2008-10. ART is poised for growth via acquisitions and growth in revenue per available unit (REVPAU) from 2008 to 2010. We expect ART to acquire S$400m of properties in 2008, to reach a target portfolio of S$2bn by end-2008. In addition, its REVPAU is expected to increase by 3-8% across the region from 2008 to 2010. On this basis, we forecast a DPU CAGR of 9% for 2008-10.

• Initiate with Outperform and DDM-derived valuation of S$1.74. We arrive at our target price of S$1.74 using DDM valuation (discount rate at 8.4%, terminal growth rate at 3%). This represents a total return of 45% from a forward yield of 6.5% in FY08 and potential price upside of 38%.