Category: ART
SREIT – OCBC
3Q09 results preview
Results preview. Four of the S-REITs under our coverage are releasing 3Q CY09 results this week, with the rest following suit in the next two weeks. Ascott Residence Trust (ART) is likely to give a poor YoY showing compared to an exceptional Olympics-driven 3Q08. For Frasers Centrepoint Trust (FCT), we expect QoQ improvements due to greater contributions from Northpoint as asset works wrap up. Our 3Q forecasts for Mapletree Logistics Trust (MLT) are fairly cautious as we expect lower occupancy levels to put a dampener on 2H09 earnings. Dilution from equity fundraising activity drives our estimate of YoY declines in DPU for CapitaCommercial Trust (CCT), CapitaMall Trust (CMT) and MLT.
Focus on occupancy & reversion data… Our primary focus will be on occupancy and rent metrics provided by the various REITs, especially in the industrial and office space. Industrial space occupancy has continued to fall, potentially leading to a moderation in portfolio occupancy at MLT (prev: 98.3%). We expect the rate of decline of achieved office rents at CCT and Suntec REIT to slow versus 1H09. Occupancy at Suntec City Office Towers fell from 96.3% as of March-end to 92.5% as of June-end as tenants redelivered part of previously-leased space. We will be looking for Suntec to at least maintain or improve that level. We will also be looking for evidence of occupancy stabilization at ART – the next challenge will be increasing rates, which requires sustained high occupancy levels.
…and on forward guidance. The tone of manager guidance versus 2Q CY09 is also worth watching. We believe managers are likely to be more optimistic in describing the outlook for the next six months (whether it is calling for stabilization or some sort of recovery depending on the property sub-sector). Guidance provided on capital market activity is also significant. We had previously highlighted FCT, Suntec and MLT as likely candidates for an acquisition/cash call two-for-one in the near-term. At last quarter’s briefing, MLT’s manager indicated interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. But in October, it walked away from a fund raising proposal. Market skepticism towards cash calls has increased in the past three months in our view, which may affect managers’ position on this issue. We maintain our NEUTRAL stance on the sector, and see continuing opportunities for yield arbitrage. Top picks are ART and FCT.
ART – Kim Eng
Ascott REIT
Previous day closing price: $0.98
Recommendation: Buy (upgraded from Hold)
Target price: $1.23 (up from $0.77)
Upgrade to Buy from Hold
Located in gateway cities of Asia, ART’s assets are poised to benefit from the Asian economic recovery, which will drive REVPAU growth in its key markets such as Singapore, China, Vietnam and Philippines. According to the management, REVPAU appears to have bottomed and results in 2H09 are likely to beat our previous forecasts.
Asian asset portfolio to ride on recovery
The ADB has just raised its economic growth forecast for Asia. Demand for travel is picking up, with tourist arrivals in Singapore showing the smallest yoy decline in August; The IATA had reported a strong improvement in the passenger demand of Asia Pacific carriers; Major hotel chains in Asia are anticipating growth and still expanding in 2009 despite the downturn. Finally, the opening of Singapore’s IRs is expected to draw a throng of expatriates, boosting REVPAU.
On the prowl for acquisition targets
Besides organic growth, ART could also begin to tap on its sponsor’s sizeable pipeline of assets in Asia for acquisitions. Based on indicative cap rates for serviced residences, Vietnam shows up as an attractive target market (9-10%). The sponsor, Ascott Group (100% owned by Capitaland) has some 1182 units of serviced residences in Vietnam, which could potentially be injected into ART. ART is also keen to invest in India, possibility through an asset injection from its sponsor.
Gunpowder for acquisitions
Our stress test shows that a further 10% decline in ART’s portfolio asset value will lift gearing from 40.7% to 45.2%. Although ART is comfortable with a gearing of around 45%, we believe this level is unsustainable given the higher prospects for acquisitions. Being committed to protecting shareholders’ value, ART has indicated that an equity-raising will only be done when there are confirmed acquisition plans.
Raising target price to $1.23
We forecast REVPAU growth of 5-20% across the key markets. Our DPU forecast for FY09-10F have been raised by 2-13%. Applying a normalized cost of equity (8.8%) and terminal growth rate of 2%, our DDM-derived target price has been raised to $1.23 (prev. $0.77). We upgrade ART to Buy.
ART – CIMB
REVPAU growth underestimated
• Upgrade to Outperform from Neutral; higher target price S$1.21 (from $0.88). We anticipate a gradual global economic recovery led by Asia to catalyse ART’s revenue per available unit (REVPAU) growth, particularly in Singapore and the Philippines. We now expect REVPAU growth of 5-30% for FY10-11 (3-10% previously) for these two markets. Our DPU estimates increase by 11-13% accordingly. We also roll over our target price to CY10, giving us a revised target price of S$1.21 (from S$0.88), still based on DDM valuation (discount 9.1%). We are positive that the short-stay business in ART’s key markets will be able to capitalise on an economic upturn. Upgrade to Outperform from Neutral.
• Assets in core growth countries. The Asian Development Bank recently lifted its forecast for growth in Asia, on the back of Asia’s relative resilience in this global economic slowdown. Five of ART’s seven markets fall into the core growth countries in Asia, auguring well for demand for its serviced apartments.
• Room rates stable; occupancy up across the region. While room rates were flat, occupancy improved in 3Q09. Singapore and the Philippines are most likely to surprise on the upside, given government-initiated catalysts. Despite increasing acquisition possibilities, REVPAU growth should take centre stage in this economic upturn, in our view.
ART – OCBC
Exploit the gap
Performance lags CDL-HT. Ascott Residence Trust (ART) has re-rated 15% since our July upgrade and has achieved our prior S$0.97 fair value. However, its performance lags closest peer CDL-Hospitality Trusts [CDLHT, NOT RATED]. Using end-June 2007 as a base, both S-REITs saw a roughly 83% decline to trough values. But CDL-HT has recovered 260% from its trough versus ART’s 177% recovery. A similar discrepancy plays out in price to book; CDL-HT is trading at 1.08x 2Q09 NAV while ART trades only at 0.71x 2Q09 NAV. There is also a 227 basis point trailing yield differential between the two.
Exploit the gap. Key drivers of this discrepancy, in our view: 1) CDL-HT is an earlier beneficiary of economic stabilization and any nascent recovery (shorter-stay hotels versus extended-stay serviced residences); 2) it is a purer IR play; 3) its balance sheet is stronger, with 19.3% leverage versus ART’s 40.7% leverage; which has led to 4) the market pricing in the possibility of a cash call. We believe value can be extracted from the gap between the two hospitality REITs even when those balance sheet risks are quantified.
FDI expected to bottom in 2009. The United Nations trade and development agency UNCTAD expects global FDI inflows to bottom in 2009 at below US$1.2 trillion and slowly recover to US$1.4t in 2010 and
US$1.8t in 2011. FDI flows are a fair proxy for corporate spend and travel and consequently, the health of the extended-stay business. 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. At 3Q09 results next month, we will look for evidence of occupancy stabilization – the next challenge will be increasing rates, which requires sustained high occupancy levels.
Attractive, even with cash call assumption. We maintain our earnings estimates but lower our discount rate inputs. Our new SOTP value for ART is S$1.40, and we charge a 15% discount to derive a fair value estimate of S$1.19 (prev: S$0.97). Fresh equity could be utilized to support asset enhancement plans and fund acquisitions, but the manager has the luxury/inclination to wait for further re-rating, in our opinion. Note that with a hypothetical equity issue raising S$150m, our SOTP value could fall to S$1.28 (S$0.87 issue price, 10% discount to current price) or to S$1.21 (S$0.68, 30% discount). This still covers our S$1.19 fair value. Maintain BUY (30% total return).