Category: ART
ART – OCBC
3Q10 results mostly in line; maintain BUY rating
3QDPU of 1.85 S-cents. Ascott Residence Trust (ART)’s 3Q10 gross revenue of S$46.5m edged up 4.8% YoY and 4.6% QoQ. However, gross profit dropped 4% YoY but rose 1.8% QoQ to S$21.2m. The manager attributed the YoY decline in gross profit to a one-time charge of prior years’ property tax of S$0.3m for an Indonesian property previously not assessed by the tax authority. Excluding further one-off adjustments in both 3Q10 and 3Q09, gross profit would have been S$21.4m and S$20.4m respectively, representing an increase of 5% YoY. The trust also declared 3Q DPU of 1.85 S cents, translating to a drop of 3.7% YoY and 1.1% QoQ. This was largely due to 419.66m new private placement units issued on 22 Sep to fund the acquisition of 28 new properties which was completed on 1 Oct. Recall that ART has previously acquired these service residence properties from its sponsor, comprising 26 in Europe and one each in Singapore and Vietnam for a sale consideration of S$969.6m. If we exclude the new private placement units, 3Q DPU would be 1.93 S cents, representing an increase of 0.5% YoY or 3.2% QoQ.
Advanced Distribution. As a result of the equity fund raising, ART will declare, in lieu of the scheduled distribution, an advanced DPU of 1.74 S cents for the period from 1 Jul to 21 Sep (day immediately prior to the date of private placement). The advanced distribution will be paid out on 19 Nov. As the trust distributes semi-annually, the remaining 3Q10 DPU of 0.11 S cents will be credited into the distributable income from 22 Sep to 31 Dec.
Portfolio Performance. ART’s RevPAU increased 7% YoY in 3Q10, mainly led by RevPAU growth of 37% in Singapore. The better performance in Singapore is mainly due to the successful launch of the refurbished apartment units of Somerset Grand Cairnhill and Somerset Liang Court. RevPAU for Australia, China, Indonesia and The Philippines also increased in 3Q10. We are also seeing better performance in Shanghai arising from World Expo. However, Tianjin’s performance declined due to increased competition and reduction in corporate accommodation budget. Japan is also facing weak market demand and lower profits due to higher repair, maintenance and advertising expenses.
Maintain BUY. Our investment thesis on ART is intact and we look forward to the performance results and revenue contribution of the 28 newly acquired properties in 4Q10. Management has also stated its confidence in delivering the forecasted 4Q DPU of 1.84 S cents as disclosed in the Offer-Information-Statement (13-Sep). Maintain BUY with an unchanged fair-value of S$1.38.
ART – DBSV
Stellar Singapore!
• 3Q10 DPU of 1.85 Scts in line
• Stellar Singapore operations drove portfolio growth
• Expanded portfolio provides stable and visible income source ahead
• Maintain BUY for exposure to booming travel industry in Asia. TP S$1.38 (20% total return)
3Q10 DPU of 1.85 Scts in line. Ascott REIT (“ART”) topline and gross profit of S$43.5m (+5% yoy, +5% qoq) and S$21.1m (-6% yoy, +2% qoq) respectively were in line with expectations. Led by strong performances in its Singapore and Philippines operations, ART achieved a portfolio RevPAU of S$130/night in 3Q10 (+7% yoy, +4% qoq) on the back of slight uptick in occupancies to 83%. Distributable income remained stable at S$11.9m, translating to a DPU of 1.85 Scts (excluding distribution to placement units, DPU will have been 1.94 Scts).
Performance pulled ahead by Singapore, With inventory in Singapore fully operational, it delivered a stunning 31% growth in topline, which was in line with expectations, driven by higher RevPAU (S$243/night, +37% yoy). This is followed closely by its operations in Australia (RevPAU: S$153, +15%yoy) and Philippines (S$137, +4% yoy), due to improved demand for rooms amid rebounding travel activities. Operations in the other remaining countries were relatively mixed.
Asia to drive 53% of topline growth going forward. With the recent portfolio injections from the sponsor completed, ART will derive 53% of its income from Asia and the remaining 47% from Europe. This will form a stable and visible income source for ART from 4Q10 onwards. We moderate our FY10-11 DPU forecast slightly to account for a stronger S$.
BUY call maintained, TP S$1.38. With FY11-12 prospective yield of c6.6-6.7%, ART offers investors an attractive exposure to the recovery in global travel & business activities. Current price offers total return of 20%.
ART – BT
Ascott Reit’s Q3 DPU down 4%
ASCOTT Residence Trust (Ascott Reit) has announced a distribution per unit of 1.85 cents for 3Q10, down 4 per cent from 1.92 cents in 3Q09. Excluding the private placement tranche of 419.66 million new units which were issued to partly fund the acquisition of 28 properties in Singapore, Vietnam and Europe, the DPU for 3Q10 would be 1.93 cents. Revenue rose 5 per cent year-on-year to $46.48 million while unitholders’ distribution rose one per cent to $11.95 million. Gross profit fell 4 per cent to $21.12 million, compared to 3Q09.
SREITs – OCBC
Yield premiums are a short-term game
A yield premium story. The FTSE REIT Index is up 11.3% year-to-date and 145.8% from its Mar 2009 low. Market attention is on low base rates and the high liquidity environment. As a result, S-REIT distribution yields have tightened to about 6.6% on average (on consensus estimates) and to sub-5% in some cases. At the same time, price-to-book ratios have trended up to 0.97x book on average, and up to 1.50x book in some cases.
But will the benchmark hold out in the L/T? We typically pit S-REIT yields against long-term government bond yields to understand the risk premium awarded to REIT investors. Bond yields are currently at historical lows – making REITs look very attractive. But this benchmark may not hold out in the long run, in our opinion. First, long-term investors have to keep in mind that base rates will go up eventually. Second, if base rates are low for a sustained period (a weak economic environment, for instance) – this may actually be a signal that the distribution yields currently being offered are not sustainable and yield premiums will trend downwards eventually. In both scenarios, our argument is that artificially-low yield premiums are a short-term play, not a long-term fundamental reason to invest in REITs.
Don't ignore price-to-book. The market seems to be focusing on relative yields, to the point of ignoring what price-to-book valuations are saying. The case for a significant premium-tobook is questionable, in our opinion. A premium-to-book value signals either: 1) existing assets are undervalued and will rerate (a 50% re-rating looks aggressive to us, though); 2) there is potential to enhance values through asset works (true in specific cases); and 3) there is potential for inorganic growth through acquisitions. But we note that REITs that are already at their medium-term leverage targets are typically able to offer yield accretion of less than 10% given strong capital values and the need to finance acquisitions via both debt and equity.
Focus on the forgotten. Our preference, from the perspective of long-term investors, is to avoid the first-tier, large-cap REITs that are natural liquidity plays (and thus, a magnet for those playing the yield-premium game). Instead, we advocate investing in the so-called "forgotten", but still credible, REITs that are offering high absolute yields and are trading at decent discounts to book value compared to their peers. Reflecting this strategy, our top picks are Ascott Residence Trust [BUY, FV: S$1.33] and Starhill Global REIT [BUY, FV: S$0.65]. Maintain NEUTRAL on the broader sector.
ART – Kim Eng
Clearing the financing hurdle
Event
• Ascott Residence Trust (ART) has successfully placed 419.7m new units to CapitaLand and other institutional investors at $1.08/unit. The new units will start trading tomorrow at 2pm. Existing unitholders can subscribe for the preferential offering of new units at $1.07/unit from Friday, on the basis of one new unit for every 10 existing units held. We estimate a yield of 6.6% for FY11F. Reiterate BUY with a reduced target price of $1.38.
Our View
• The private placement was three times subscribed by a good mix of investors from Asia, Australia and Europe. Of the 419.7m private placement new units, 203.2m units were placed to CapitaLand Group in order for it to maintain its 47.7% unitholding in ART.
• As part of this equity fund raising (EFR), another 67.9m preferential new units – at $1.07/unit – will be offered to Singapore‐registered unitholders on a non‐renounceable basis of one new unit for every 10 existing units held. Application for the preferential offering opens on Friday at 9am and closes on 30 September at 5pm via acceptance form and at 9.30pm via ATM.
• The proceeds from the entire EFR will amount to about $526m to be used for defraying the cost of acquiring the 28 properties announced on 20 August. While the yield accretion for FY10F‐11F is marginal, we believe the enlarged portfolio ($2.9b) will enhance ART’s income stability and increase its exposure to more established markets in Europe.
Action & Recommendation
We continue to favour ART for two reasons: 1) its ability to unlock value for its unitholders, which is borne out by its track record of property divestments in Jakarta and Beijing this year, and 2) its strong execution capability as evidenced by its successful EFR and acquisitions. We reiterate our BUY recommendation but lower our target price to $1.38, from $1.45, after revising our earnings estimates.