ART – OCBC
1Q boosted by recent acquisitions
Results benefited from recent acquisitions. Ascott Residence Trust (ART) reported 1Q07 revenue of S$29m and distributable income of S$8m, 5% and 10% higher than its own forecasts respectively. Distributable income per unit (DPU) was 1.59 cents, in line with forecast. ART’s higher 1Q revenue was primarily driven by higher average daily rates in Singapore and the Philippines. The strong performance was further boosted by the inclusion of the Philippines (Ascott Makati) and Vietnam in late March 2007.
More of the same in 2H07. In 2006, ART announced the acquisition of five assets worth about S$218m. So far this year, ART has announced deals worth S$144m, and when completed, this will raise its asset size to about S$1.1bn. This implies asset growth of 40% since its IPO. Going into 2H07, we see ART announcing more acquisitions to drive its growth.
Cash call well subscribed. In our Jan 07 report, we had articulated that a cash call was imminent. This was because as of end 2006, 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. Indeed in Mar ART had an equity fund raising to raise S$199m via the issue of 105.3m new units. The fresh equity together with the credit rating means that ART is ready for further acquisitions. We estimate that it has an estimated war chest of about S$353m.
ART S$2.0bn target size is achievable. With the potential to gear up to 60%, ART should see no issue in achieving its target asset size of S$2.0bn by end 2008. Based on current size of S$1.1bn, this means about S$450m of acquisitions per year. We see a high possibility of ART exceeding this and believe S$2.5bn as achievable with the bulk of its acquisitions coming
from parent The Ascott Group.
Maintain fair value S$1.94. Even though we continue to like ART as a unique service residential REIT play, capital value upside remains limited. Moreover with DPU yield at only about 3.7%, the estimated total potential return of only about 8.5% is not compelling. We thus maintain our HOLD rating and fair value estimate of S$1.94.