Category: ART
REITs – MS
Still the Best Way Forward
Maintain In-Line view: S-REITs remain our preferred sector exposure within the Singapore property space at least for 2009. S-REITs have not disappointed in terms of refinancing their debt. Indeed, they recapitalized their balance sheets 6 months ahead of our expectations. At least for 2009 and to a certain extent 2010, there is less risk of S-REITs cutting their dividend payout due to pressure from rising leverage. We remain comfortable that the recent fall in commitment rents will be marginally negative for 2009 earnings given that the brunt of the decline will be felt only in 2010 and 2011. A near-term positive catalyst for S-REITs is if the benchmark interest rate remains low after its recent decline.
We have a new sector top pick – A-REIT: We initiate coverage on A-REIT with an EW rating and price target of S$1.70, suggesting 11% upside from current levels. We like its 8.5-8.7% FY2010-11E dividend yield, the highest amongst its larger-cap peers, and find its recent underperformance unjustified. See our note, Steady as She Goes, published June 9, for details.
What’s new: We have revised our earnings forecasts by -1% to 39% for F2009-10E and raised our price targets by 17-112%. Given the improvement in liquidity in the equity market, investors may be willing to pay a premium above intrinsic value. Hence, for stocks that have recently recapitalized, we assign a 30% probability to our bull-case NAV and a 70% probability to our base-case NAV to calculate our price targets. We are maintaining our EW ratings on CapitaCommercial Trust, CapitaMall Trust, and CDLHT, and are downgrading Suntec REIT to Underweight given its 23% downside risk from current levels. We maintain our UW on ART.
Our investment philosophy for the S-REIT sector remains intact. Given that all the property segments – office, retail, industrial, and hospitality – are seeing oversupply for 2009-2010, the playing field is level. Moreover, all the S-REITs within our coverage are backed by strong parents and quality assets within their respective segments.
ART – DBS
Results below estimates
• Ascott Residence Trust (ART) results were slightly below expectations.
• Decline in RevPAU is more than expected
• Uncertainty in major operational markets likely to cap share performance
• Maintain HOLD with TP of $0.59
Results slightly below estimates. Gross revenues and NPI declined by 3.7% to S$42.1m and S$19.9m respectively. This was driven by weaker RevPAU in its major operational markets, which fell by 15% to a portfolio average of S$120. Distributable income was 23% lower at S$10.8m, translating to a DPU of 1.77 Scts for the quarter. On a sequential basis, performance was also slightly weaker, with RevPAU registered a 5% decline.
Balance sheet remains healthy with a gearing ratio of 38% and interest cover of 3.4x.
Adjusting DPU estimates. We lowered our forward RevPAU estimates to take into account a larger than expected fall in RevPAU for Singapore and China, resulting in a lower FY09-10F DPU estimate of 7.1 Scts and 6.9 Scts.
Maintain HOLD, TP $0.59 While ART’s valuation of 0.3x P/BV is one of the lowest valued S-reits in the sector, uncertainty from its major regional markets is likely to overhang on share price performance in the near term. Maintain HOLD, TP lowered to S$0.59 based on DCF. ART currently offers a FY09-10F DPU yield of 15%.
ART – CIMB
Not much downside from here
• 1Q09 results in line, RevPAU down 15% yoy. 1Q09 distributable income of S$10.8m and DPU of 1.77cts were in line with Street and our expectations, forming 25% of our full-year estimates. Yoy, revenue contracted 8%; qoq, the contraction was worse, at -12%. This was blamed on falling RevPAU in the key markets of Singapore (-32.7%), Australia (-23.3%) and China (-18.7%). Japan was the only country with positive growth (5.9%). RevPAU for the group fell 15% yoy. The weak performance was partially due to the typical business-travel lull period in the first and fourth quarters of the year. Lunar New Year holidays in January this year also slowed down travel more than usual in China.
• Net property income (NPI) margins up 3.5% pts qoq. NPI of S$19.9m for 1Q09 was down 16% yoy. On a positive note, the rate of qoq decline slowed to -5%, underpinned by good cost-control. NPI margins improved 3.5% pts from the last quarter, reaching 47.3% in 1Q09. The most significant qoq progress came from Singapore (+20.3%) and Japan (+11%).
• Negotiations for debt refinancing in progress. ART has S$111.6m of debt due for refinancing this year: 86% of this (estimated S$96m) will be due in Dec 09. Management has started negotiations for the refinancing of this debt. Asset leverage at 38.7% remained comfortable.
• Upgrade to Neutral from Underperform; no change in estimates and target price of S$0.56. We are satisfied with our projection of up to a 20% decline in full year RevPAU vs. ART’s performance in 1Q09, which is a traditionally weak quarter. Our DDM-derived target price (discount 10.5%) stays at S$0.56. With our recently revised STI target of 2,160, potential upside to our target for ART is 22%, in line with our expectations for the market. Current P/BV of 0.32x with a prospective 15.6% forward yield looks attractive relative to the sector average of 0.4x. We believe RevPAU and distribution are not likely to deteriorate much from here. Upgrade to Neutral on valuation grounds.
ART – BT
SINGAPORE – Ascott Residence Trust recorded a 24 per cent drop in its distribution per unit for Q1 2009 year-on-year, from 2.33 cents to 1.77 cents.
Gross profit for the quarter fell 16 per cent compared to the same period from a year ago, from $23.6 million to $19.9 million.
The trust attributed the lower profit to the economic downturn which had affected the Asian hospitality industry.
ART – OCBC
Long term growth, albeit with near-term volatility
Part of a strong franchise. We are re-initiating coverage on Ascott Residence Trust (ART). ART owns a portfolio of serviced residence and rental housing properties in the pan-Asian region. The REIT’s properties are managed by The Ascott Group (Ascott), the serviced residence arm of 47.2% stakeholder CapitaLand. Ascott is the world’s largest international serviced residence owner-operator and has a 25-year industry track record. Its serviced residence brands enjoy world-wide recognition and strong award-winning reputations. ART’s highly diversified portfolio spans 11 cities in seven countries with no country contributing more than 25% of total FY08 revenue. ART trades at one of the highest forward yields within the S-REIT sector. It is also trading at a 68% discount to last reported NAV.
Near-term yield volatility. RevPAU is the key metric driving ART’s earnings and distributions performance. 4Q08 RevPAU showed the first impact of global economic events. ART’s China properties saw a 43% drop in 4Q RevPAU to S$127, as rates and occupancy fell post-Olympics. ART’s Singapore properties saw a 12% decline in 4Q08 RevPAU to S$230. We expect RevPAU to remain volatile (and on a downtrend) with demand for corporate travel impacted by the current macroeconomic turmoil. We are estimating DPU of 6.6 S cents for FY09F (down 24% YoY) and 6.2 S cents for FY10F (down 7% YoY). These figures are roughly 6-7% below consensus.
A viable investment option. While we agree that yields will decline in FY09-10F, ART’s current valuation seems to be pricing in a perpetual bear case. In our view, current share prices reflect a belief that business conditions deteriorate to a certain extent and then stay that way. The investment question then breaks down into two components: 1) A volatile (but still comfortable) yield over the next two years, and 2) A very low “floor” valuation that leaves ample room on the upside. We believe ART is a viable investment option for investors who can accept the near-term yield volatility and judge ART on the basis of its long-term prospects (which we think are sound).
Re-initiating with BUY rating. Our SOTP value of the trust is S$0.76. This incorporates our assumption of an equity issue of S$160m at the S$0.45 price level. Our fair value estimate for ART is S$0.57, at a 25% discount to our SOTP value. Key risks to our estimates include a worsethan- expected deterioration in the economic outlook in ART’s operating markets, a larger-than-expected cash call or more-than-expected dilution, and higher debt costs.