AscottREIT – CIMB

Good but not great

ART recently announced its acquisition of Infini Garden in Fukuoka, Japan for JPY6.3bn (c.S$78.4m). With an expected yield of 6.6%, we view this acquisition positively. However, given the limited impact on earnings from this acquisition, we maintain our Hold rating on the stock with a slightly higher DDM-based (discount rate: 8.5%) target price of S$1.23 as we await more acquisitions.

What Happened

Ascott Residence Trust (ART) recently announced an acquisition of a rental housing property in Fukuoka, named Infini Garden, for JPY6.3bn (c.S$78.4m) from The Ascott Limited and ArcResidential Japan Investments Limited. Theproperty, ART’s second asset in Fukuoka, is a freehold property with 389 apartments, 5 retail units and 389 carpark lots with a NLA of 33,520sqm. Infini Garden is centrally located in Island City, which has become an increasingly popular area after it underwent a major infrastructure development in recent years. The property is located near the upcoming Fukuoka Children’s hospital and a 25 minute drive to the central business district, offering 2, 3 and 4 bedroom apartments.

What We Think

At a 6.6% yield and fully-funded by debt costing c.1.8%, we expect the acquisition to be yield-accretive and raise FY14-16 EPS by 0.7-1.5%. We estimate currency occupancy to be over 80%, but the master lease due to expire in June 2018 is expected to provide income stability. Post the acquisition, master lease contribution to overall portfolio gross profit is expected to grow from 32% to 34%. Additionally, exposure to Japan will grow to 14% (+2%), while gearing is expected to grow from 34% to c.36%. Although this acquisition will provide some positive impetus to the share price, its impact is relatively small, in our view. To date, the value of the Dalian and Japan acquisitions post the rights issue form 77.7% of the S$253.7m raised in December, while our FY14-15 DPU estimates remain c.7.7% below our pre-rights issue estimates.

What You Should Do

ART is currently trading at 7.3%/7.6% FY14/FY15 dividend yield, slightly below 7.6%/7.8% of the hospitality REITs sector. As such, we have maintained our Hold rating on ART with a slightly higher target price of S$1.23 while we await more yield-accretive acquisitions going forward.