Sitting pretty

• Sequential improvement in 3Q09 on the back of improving operational performance
• RevPAU up 4% qoq from higher occupancies
• Maintain BUY, TP S$1.25

Improving operations. Ascott Residence Trust (ART) reported 3Q09 results in line with expectations. While revenues and gross profits were 17% and 21% lower yoy to S$44.4m and S$22.0m owing to a exceptional Beijing Olympics last year, performance showed a sequential improvement from rising demand seen in their Singapore, China, Japan and Indonesian operations. Distributable income came in at S$11.8m (-25% yoy, +7% qoq), translating to a DPU of 1.92 Scts.

RevPAU up 4% qoq – a good sign. We are encouraged by further signs of improvement in ART’s core markets in Singapore, China and Japan. As such, we are adjusting our occupancy estimates upwards by up to 2% to reflect our more positive outlook for travel demand and expansion in annual travel budgets of corporate, thus fueling demand for accommodation. DPU forecast for FY10 and FY11 adjusted up by 2.4% and 2.6%.

Maintain BUY, TP S$1.25. On the back of an improving travel outlook, we are positive that ART will be able to deliver a sustained FY09-11F DPU yield of 6.6 – 7.5%. Maintain BUY, with revised TP of S$1.25 on slightly lower WACC assumptions. (-25 bps). Further upside catalysts will include (i) stronger than expected RevPAU performance in 4q09, (ii) accretive acquisitions.

Improving performance, but upside limited

• Downgrade to Neutral from Outperform; unchanged DDM-based target price of S$1.21. ART’s 3Q09 results met Street and our expectations. Although revenue per available unit (REVPAU) improved as we anticipated, and although we remain positive on the hospitality sector, ART has already outperformed since our upgrade early this month, pricing in the positives. Hence we downgrade our recommendation to Neutral from Outperform.

• Results in line. YTD DPU of 5.48cts forms 75% of our full-year forecast. 3Q09 DPU of 1.92cts (26% of full-year forecast) was down 26.4% yoy due mainly to weaker demand for serviced residences in Singapore and China as a result of the global economic slowdown. However, DPU improved 7.3% qoq as REVPAU strengthened across the board. Tighter control of property-related expenses also lifted gross profit by 6% qoq to S$22m.

• Portfolio REVPAU grew. REVPAU, which had been declining since 4Q08, finally grew 4.2% qoq in 3Q09 to reach S$124. The recovery was led by Japan (+24.4% qoq) on the back of a stronger yen, Singapore (+14.9% qoq) and China (+6.8% qoq). REVPAU in three out of its seven countries remained in negative region, including Australia (-6.2%), Vietnam (-1.6%) and the Philippines (-3.5%).

• No changes in assumptions. We continue to expect REVPAU growth to be led by Singapore (+30%), the Philippines (+15%) and Vietnam (+10%) in 2010. Our DPU estimates and DDM-derived target price of S$1.21 are unchanged (discount rate 9.1%).

3Q outperforms expectations

Outperforms expectations. Ascott Residence Trust (ART) posted S$44.4m in 3Q09 revenue, down 16.4% YoY but up 3.3% QoQ. Similarly, gross profit declined 21% YoY but increased 5.6% QoQ to S$22m. Portfolio RevPAU for the quarter was S$124 per day compared to S$163 in 3Q08 (-23.9%) and S$119 in 2Q09 (+4.2%). Results outperformed expectations, with revenue and gross profit beating our estimates by 3.5% and 9.9% respectively. 3Q DPU of 1.92 S cents was 6.9% higher than our estimate of 1.80 S cents. Note that distributions are paid on a half-yearly basis.

Occupancy gains drive RevPAU. At 2Q09 results, we had noted that performance in major markets seemed to be leveling off or recovering slightly. This trend continued in 3Q, with improving occupancy levels driving QoQ increases in RevPAU. Singapore was a star performer with RevPAU up 14.9% QoQ, while China saw a smaller QoQ increase of 6.8%. These two major markets are still off 32-44% from their peaks in 3Q08 (an exceptional Olympics-fueled quarter for China). Japan recorded a 24% QoQ increase in RevPAU, which we understand is due largely to forex effects as well as slight occupancy improvements. RevPAU in the other markets was stable or slightly negative QoQ due primarily to forex and/or seasonal effects.

Guidance hopeful but cautious. The manager said that “the severe challenges posed by the global economic downturn to the hospitality industry have eased”. It guided that while it remains cautious of the pace and extent of the recovery, it is “confident of the longer-term growth in the markets” in which ART operates. It also said it is accelerating asset enhancement plans for selected properties. 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 coming months 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.

Valuations remain attractive. We have revised our estimates to reflect actual 9M09 figures. Our fair value estimate of S$1.19 (unchanged) is derived by charging a 15% discount to our SOTP value of S$1.40 for ART. Fresh equity could be utilized to support asset enhancement plans and fund acquisitions, but we believe our fair value estimate is covered even when fund-raising risks are quantified. ART has re-rated 10% since our last update in September; we continue to find valuations attractive. Maintain BUY.

Ascott Reit distribution slips 25%

ASCOTT Residence Trust (Ascott Reit) said that third- quarter unit-holders’ distribution fell 25 per cent to $11.8 million from $15.9 million a year ago as it saw weaker demand for its serviced residences in Singapore and China.

Distribution per unit (DPU) was 1.92 cents for the quarter ended Sept 30, 2009, down 26 per cent from 2.61 cents in Q3 2008.

‘The lower performance as compared to Q3 2008 was a result of the global economic slowdown, increased competition from new supply in Beijing and Shanghai, and the strong performance in August 2008 due to the Beijing Olympics,’ said the real estate investment trust (Reit) in a statement. Revenue per available unit, or RevPAU, fell 24 per cent year-on-year to $124 in Q3 2009. The reduction in RevPAU was due to reduction in both average daily rates as well as occupancies at the group’s serviced residences. Revenue for Q3 2009 fell 17 per cent to $44.4 million.

The trust’s management said, however, that the challenges posed by the global economic downturn to the hospitality industry eased somewhat in Q3 2009 compared to Q2.

‘Our Q3 operating performance has shown further signs of stabilisation in hospitality demand,’ said Lim Jit Poh, the trust’s chairman. ‘While we remain cautious over the pace and extent of recovery, we are confident of the longer-term growth in the markets in which we operate.’ On a sequential basis, unit-holders’ distribution and DPU were 7 per cent higher than Q2’s $11 million and 1.79 cents respectively.

Ascott Reit’s portfolio operating performance also improved in Q3 over Q2, led by RevPAU growth in Japan, Singapore and China of 24 per cent, 15 per cent and 7 per cent respectively.

To ride on the expected upturn in demand as the economy recovers, Ascott Reit has accelerated its asset enhancement initiatives for selected properties. It will also continue to seek yield-accretive acquisitions, it said. The company’s shares fell 2 cents, or 1.8 per cent, to $1.07 yesterday.