Category: ART
ART – BT
Ascott Residence Trust’s Q4 distribution up 12%
ASCOTT Residence Trust (ART) yesterday said that unitholders’ distribution for the fourth quarter ended Dec 31, 2009, rose 12 per cent to $11.5 million, from $10.3 million a year ago.
The rise was despite a 2 per cent dip in revenue for the three months to $46.1 million mainly due to weaker demand for serviced residences in Singapore. Revenue in Q4 2008 was boosted by the higher rental rates contracted in the earlier months of 2008 before the onset of the global financial crisis, ART said.
But the trust’s gross profit rose 7 per cent to $21.9 million as its direct expenses fell year-on-year. Distribution per unit (DPU) for Q4 2009 rose to 1.87 cents from 1.69 cents for Q4 2008.
ART achieved a RevPAU (revenue per available unit) of $124 in Q4 2009 – a decrease of 7 per cent as compared to 4Q 2008. This came about from a reduction in the average daily rates of its serviced residences, the trust said.
The trust is upbeat about its prospects in 2010 and remains confident of the longer term growth in the markets where it operates.
‘We have seen a continued stability in hospitality demand extending from Q3 2009 into Q4,’ said Lim Jit Poh, chairman of the trust’s manager. ‘We expect improvement in hospitality demand in 2010 in line with the more positive economic sentiments though the extent of the economic recovery is uncertain.’
For the whole of 2009, ART’s distribution to unitholders fell 16 per cent to $45.2 million from $53.7 million in 2008. DPU fell 17 per cent to 7.32 cents from 8.78 cents.
Chief executive Chong Kee Hiong said ART has accelerated asset enhancement plans for selected properties including Somerset Grand Cairnhill and Somerset Liang Court in Singapore and Somerset Grand Hanoi in Vietnam to improve asset yields. ‘We will also seek accretive acquisition opportunities to expand Ascott Reit’s portfolio,’ he added.
ART’s portfolio comprises 38 properties with 3,644 units in seven countries. The stock lost 5 cents to end at $1.28 yesterday.
ART – OCBC
4Q09 in line; revising our FY10F estimates upwards
4Q09 in line with our estimates. Ascott Residence Trust (ART) posted S$46.1m in 4Q revenue, down 2.4% YoY but up 3.8% QoQ. ART will distribute S$11.5m, up 11.8% YoY but down 2.5% QoQ. This is equivalent to 1.87 S cents DPU, just 1.5% shy of our estimate of 1.90 S cents. ART booked an
S$11.7m gain in property values versus June 2009. Overall RevPAU was S$124 compared to S$133 in 4Q08 (-6.8% YoY) and S$124 in 3Q09 (flat).
Tone of guidance positive. The manager said that it expects “improvement in hospitality demand in 2010 in line with the more positive economic sentiments, though the extent of the economic recovery is uncertain.” Occupancy levels have stabilized and in some markets, approaching levels where there is scope for rate increases. The manager did say that visibility was still limited, and 1Q10 results would bring more clarity. ART will “seek accretive acquisition opportunities to expand [ART’s] portfolio”. It sees opportunities in China, Vietnam, India (a new market for ART) and potentially Singapore.
Full speed ahead on asset enhancement plans. ART reiterated it is taking advantage of the occupancy lull to press ahead on asset works. The manager guided that it is targeting refurbishments of five properties each in 2010 and 2011. This includes Somerset Liang Court and Somerset Grand Cairnhill in Singapore and Somerset Grand Hanoi in Vietnam. These properties were last refurbished 10-12 years ago. The planned works will be funded using a combination of debt and operating cash flows.
“Comfortable” with current leverage quantum. The manager said that bank commitments & existing facilities are sufficient to re-finance debt maturing in 2010 (15% of total outstanding). It has already initiated talks with lenders on refinancing the much larger proportion of debt due in 2011 (59% of total). ART also said it was satisfied with current leverage of 41.2%, and is comfortable going up to 45-50% debt-to-assets.
We still see value in ART as a recovery play. We had previously projected a flat FY10F RevPAU. Keeping 1) FY09 performance; 2) manager guidance; and 3) our expectations for a recovery in corporate travel in mind: we now expect a pick-up in RevPAU in Singapore, China and Australia this year itself. We hike up our FY10F revenue and distributable income estimates 7-10% over previous estimates. We have also adjusted our WACC assumption down slightly. Our fair value estimate is accordingly up 10% from S$1.25 to S$1.38. Maintain BUY.
SREITs – OCBC
Our wish list for 2010
2009 has been an interesting year for the S-REIT sector, with the Great Financial Crisis exposing weaknesses in a structure many thought of as invulnerable. Keeping both the S-REITs’ strengths and weaknesses in mind, here are a few changes we would like to see in 2010…
(1) Increased alignment of incentives. Most REIT managers are currently earning fees based on asset value and on net property income (NPI). Historically, S-REITs have relied heavily on acquisitions to grow both NPI and portfolio size, especially with the added kicker of acquisition fees. Depending on the pricing and financing structure, these two metrics can be increased with no net benefit (or even a cost) to unitholders. A recent RiskMetrics report1 suggests pegging a substantial part of manager fees to total shareholder return. No fee structure is perfect but we feel this issue warrants further attention and discussion.
(2) More transparency of relationship with sponsor. The S-REIT sector has traditionally had a bias towards developersponsored REITs. These REITs are inextricably tied to their sponsors on several levels including property management, REIT management and through acquisition pipelines. In the current de-leveraging environment, we believe several sponsors will sell their assets to their REITs. Pipelines can be a competitive advantage – ultimately an investor may be buying access to quality assets. But pricing and strategic benefit to the REIT is always a concern. We would like to see increased transparency of the acquisition decision-making process that goes beyond a comparison of the acquisition cost versus the independent valuation of the target property.
(3) Renewed focus on value accretion. We expect REITs to return to their growth-via-acquisition strategy. We note that historically the market has focused primarily on yield accretion, which may be more a function of the amount of leverage used to make the purchase than anything else. Third-party or pipeline-driven, we would like to see more attention on the value-add of the proposed acquisition. The market needs to ask harder questions including: Why is the REIT making this purchase? Does this purchase enhance the overall portfolio? What are the strategic considerations behind this decision? Is this a good buy on an un-leveraged basis?
Valuation. Our key ratings drivers in 2010 are 1) earnings trends; 2) leverage and outstanding issues; 3) manager commitment to protecting and creating value; and 4) relative valuations. We maintain our NEUTRAL rating on the REIT sector. Mapletree Logistics Trust [BUY, FV: S$0.78] and Ascott Residence Trust [BUY, FV: S$1.25] are our top picks for the sector.
ART – OCBC
Compelling earnings story
Guidance hopeful but cautious. At 3Q09 results, Ascott Residence Trust (ART)’s manager said that while it remained cautious of the pace and extent of the economic recovery, it was “confident of the longer-term growth in the markets” in which ART operates. Our view is that the worst is behind ART – we believe Pan-Asian markets, where ART operates, will continue to be attractive FDI destinations. We think ART may shine in the year ahead as corporate spend and travel gradually return. The challenge now is increasing, and sustaining, occupancy at levels that allow for a successful increase in unit rates. Note that we are currently estimating flat RevPAU growth in FY10, which is fairly conservative.
Valuation picture is mixed. ART has re-rated 37% since our July upgrade and is now trading close to our previous S$1.19 fair value estimate. We use pre-crisis valuation levels as a sanity check on current pricing. The current price to book value of 0.87x already exceeds the 0.75x averaged in 2H 2006 but still offers 22% upside to the 1.06x book averaged in 2007. Distribution yields present a different picture. Using consensus estimates, the current forward yield of 6.35% already outperforms the 7.01% consensus yield averaged in 2007. We believe this could be because ART is at the trough (in our opinion) of a tough earnings cycle and the market may be pricing in significant earnings recovery, which is justified. Nevertheless, current pricing is more attractive than that of peer CDL-Hospitality Trusts [NOT RATED], which is trading at 4.7% consensus forward yield and 1.19x book value.
What next? ART is geared at 41.5% debt-to-assets and is due for asset revaluations in 4Q09. While we don’t expect significant downward revaluations, ART’s gearing is one of the highest in the S-REIT sector in a climate where the concept of leverage above 35% is now outmoded (in our opinion). So far, the manager has been remarkably disciplined about protecting value and has not raised equity since FY07. In 2010, fresh equity, likely raised through a private placement, could be used to fund asset enhancement works or yield-accretive acquisitions. A virtuous cycle of cheap acquisitions at cheaper capital is achievable if the manager maintains its focus on value protection and creation. Maintain BUY with fair value increased from S$1.19 to S$1.25 (14.9% total return). Key risk to our thesis is heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.
REITs – OCBC
The virtuous and the not-so-virtuous
Policy and leverage appetite shapes 2010. We believe the Singaporelisted REIT sector’s 2010 performance will be influenced by opposing systemic forces. A favorable policy climate is likely to sustain a high liquidity environment. While some S-REITs may book negative revaluations in 4Q09, the ‘Bernanke Put’ could potentially create a floor for asset values in 2010. On the flipside, the rules for leverage have changed and increased conservatism is the new normal. Over-leveraged players (by today’s standards) may need to reduce gearing through equity fund-raising or asset sales. This de-leveraging can potentially occur not only on the REIT level, but also on the sponsor, manager, and institutional investor level.
The virtuous and the not-so-virtuous. 2010 will not be an ‘easy’ market, in our view, as we expect greater variance in performance among the individual REITs. We believe the sector can be broadly divided into two camps differentiated by leverage, sponsor strength, and sub-sector specific differences in forward earnings performance. Investment opportunities are available in both camps but of different varieties: the stronger REITs may enjoy yield compression and price-to-book normalization, and can potentially tap into a virtuous cycle of accretive acquisitions. On the other hand, the weaker REITs could be trapped in a vicious cycle of declining asset value, refinancing difficulties, and a consequent need to de-leverage. For those REITs with outstanding challenges, we advise interested investors to wait until after a resolution is proposed and the extent of any dilution is clear.
Limited upside, risks to the downside. We use 2006 valuations as a sanity check on the current recovery. The sector trades on average at 0.78x book, still below the 0.89x average in 2006. The potential 13.4% increase from current levels is offset, however, by book value risk from 4Q09 revaluations. A 6.9% potential upside from a distribution yield perspective is also offset by a mixed earnings outlook. With an unexciting risk-reward ratio for 2010, we maintain our NEUTRAL rating on S-REITs. Within our coverage universe, we have BUY ratings on Mapletree Logistics Trust [MLT, FV: S$0.78], Ascott Residence Trust [ART, FV: S$1.25], and Suntec REIT [FV: S$1.40]. Our top picks for the sector are ART and MLT, for ART’s positive earning outlook and MLT’s earnings stability, and for the possibility of yield-accretive acquisitions at both REITs. Key risks to our thesis include an increase in interest rates (which we believe would impact the blue chips the most), a double-dip recession and the threat of a new asset bubble.