Category: ART
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%)
ART – Lim and Tan
• Distribution per unit (DPU) for Q4 ’10 of 2.16 cents is 17% higher than forecast at the time of the acquisition (from parent CapitaLand) of 28 properties in Europe.
• On an annualized basis, that works out to 7.8 cents, which is in line with 7.74 cents management has expressed confidence in achieving for ye Dec ’20.
• At $1.22, the yield is still an attractive 6.3%, especially given the brightening prospects for the global economy / hospitality sector.
• Indeed, management is particularly bullish on home market, as well as London, as she gets ready for the 2012 Olympics. (Note London was the key contributor to beating internal targets in Q4, with Revenue 15% better, and Gross Profit 31% above.)
• We maintain BUY.
ART – DBSV
Poised for bigger things
• Enhanced earnings stability via European portfolio purchase
• Organic growth drivers present, +9% DPU boost to forecast in FY11
• Pursuing further growth through acquisitions in Pan Asia region
• BUY, TP S$1.38 offers a total return of 16%
Earnings stability from European assets. After the acquisition of the European portfolio from its sponsor, Ascott REIT will enjoy greater earnings stability and visibility, with average length of stay increasing to 2 years. Going forward, we estimate that 40% of its EBITDA will be backed by master leases/income guarantee structures.
9% growth in DPU in 2011, one of the strongest amongst SREIT peers. Growth from (i) rebounding travel demand across its Pan Asia portfolio (contributing 60%of FY11F EBITDA) with Singapore as the strongest performer given its robust outlook post opening of the 2 IRs, boosted by the opening of its newly refurbished rooms and newly acquired Citadines Mount Sophia, (ii) London (contributing 11% of FY11F EBITDA) to show sustained growth in RevPAU upon the phased completion of its refurbishment exercise at Citadines South Kensington & Holborn-Covent Garden properties, coupled with improving operating environment.
Pursuing acquisitions. After consolidating the European acquisitions, the focus will be on opportunities in the Pan Asia region to grow its exposure in “growth” economies, where the serviced residences concept thrives. The sponsor, Ascott Limited continues to offer a source of acquisition possibilities, estimated at over S$1.5bn in assets (over 6,000 units), which we believe could be injected opportunistically in the medium term.
BUY call maintained, TP S$1.38 offers total return of 16% We believe Ascott REIT has emerged stronger after its recent acquisitions and continues to offer good exposure to the robust travel market in Asia. FY11F-13F yields of 6.1-6.8% remain attractive, with further upside from potential execution of accretive acquisitions, which we have not factored in our forecasts.
Singapore Reits – DBS
The quest for growth
• S-REITs offer FY11 yields of 6.1%, an attractive 340 bps spread against long bonds
• As inflation inches higher, we prefer SREITs with ability to continue delivering strong organic growth
• Strong balance sheets to leverage on in the chase for further acquisitions
• BUY FCT, P-Life, Cache, MLT, CDL HT, ART, CMT
Normalized FY11F yield of 6.1%. The S-REIT sector now trades at a normalized FY11F distribution yield of c6.1%, slightly below its historical mean of c6.5%. Spreads have narrowed but still remain attractive at c340bps above the long-term government bond yield, currently at c2.7%.
The quest for DPU growth. S-REITs offer a good hedge against inflation given that earnings growth can potentially outpace inflation, which is expected to inch higher to 3.2% in 2011. We prefer S-REITs with the ability to deliver growing distributions organically while having the opportunity to acquire accretively. We continue to hold the view that hospitality and retail sectors offer a more robust outlook on the back of expected strong visitor arrivals in 2011. Office REITs are expected to see topline pressure from negative reversions in 2011 though the sector is on an uptrend.
Interest rate hikes to have minimal impact on distributable income. Given the current low interest rate environment, S-REITs have taken the opportunity to refinance, lengthen the debt maturity profile as well as widen their sources of debt, hence enjoying savings in interest. DBS economist expects interest rate hikes only towards the end of 2011. Even then, our scenario analysis reveals that the impact on S-REITs FY11 distributable income is limited to -0.2 to -3.0% as majority of the S-REITs have hedged/fixed their interest rate positions.
Industrial & Sponsored REITs have potential for further accretive acquisitions. Even after acquiring cS$6bn of assets YTD, S-REIT sector gearing remains low at 34.4%. Further growth from acquisitions is possible and we look towards the industrial REITs for their ability to acquire earnings accretive assets given the relative higher yields of industrial assets while sponsored REITs continue to offer long-term portfolio growth visibility to investors from potential asset injections in the medium term.
Stock picks. CMT, FCT, CDL HT and Ascott REIT are expected to deliver strong organic growth potential coupled with sponsor injection possibilities. P-Life offers downside protection as revenue is pegged to inflation. MLT and Cache offer potential earnings surprise given their visible sponsor pipeline.
ART – CIMB
Asian growth less than ideal
• Below expectations; downgrade to Underperform from Outperform. 3Q10 results were below Street and our expectations with DPU of 1.93cts (excluding new placement units) forming 23% of our FY10 forecast (we had expected 26%) due to lower-than-expected growth in REVPAU. YTD DPU forms only 65% of our estimate. We factor in equity fund-raising, contributions from its European portfolio and moderated REVPAU assumptions for the Philippines and Vietnam. As a result, we cut our DPU estimates by 7-10% for FY10-12. We also roll over our target price to end-CY11. Our DDM target price (discount rate 8.3%) falls to S$1.24 from S$1.35. Although ART does not appear too expensive at about book value (proforma NAV S$1.28) and dividend yields are in line with the SREIT average, we downgrade it to Underperform, recommending a switch to SREITs with more Singapore-centric assets as: 1) Asian growth (other than Singapore) has not been as strong as anticipated; 2) the addition of its European portfolio will dilute the growth impact from Asia; 3) forex risks and tax leakages have increased; and 4) limited price upside. These are expected to provide de-rating catalysts.
• YTD distribution falls short with fewer non-tax deductible items. 3Q10 DPU of 1.93cts (excluding new units) was not strong enough to pull up YTD DPU as we had expected a strong quarter to make up for 1H10. 9M10 DPU of 5.46cts (excluding new placement units) forms only 65% of our FY10 forecast which had not accounted for its European portfolio. Fewer-than-anticipated non-tax deductible items and higher-than-expected taxes were the main reasons. Actual DPU to be paid taking into account new units issued would be 5.38cts for 9M10.
• Expect higher taxes from Europe. Compared to our forecast of 8.35cts in our last report dated 23 Aug following its European acquisition, our DPU forecasts have been cut by 5% on higher assumptions of corporate taxes for its European portfolio (estimated at 28%).