1H08 Results in Line

Story: Ascott Residence Trust (ART) turned it a stable 2Q performance. Gross revenues grew 13% yoy to $46m and net property income grew by 27% to $23.2m, coming in within 50% of our full year forecasts. Distributable income also grew 10% yoy to $13m in 2Q08, translating to a DPU of 2.19 cts for 2Q. ART also announced a distribution of 4.52 cts per unit for its 1H08 performance.

Point: Growth was largely derived from i) organic growth driven by the outperformance of its Singapore and Vietnam operations. On a same store basis, revenue contribution from existing properties grew 7% to S$43m and gross profit grew 19% to S$21.6m and ii) new contributions from asset acquisitions in Japan and Australia, adding $2.5m and $1.6m to revenue and net property income respectively. Outlook remains stable given that 55% of its rental income are signed on a long term basis, (> 6 months), average length of stay for the portfolio stands at more than 8 months. Outlook for its major markets, namely Singapore, Vietnam, China and Philippines remains stable in the face of a tight supply for quality serviced residence accommodation, forming a base for a sustained performance in near term.

Relevance: We continue to like ART for its exposure in the Asian mid-term hospitality sector that is still expected to remain firm in the medium term. As such we re-initiate coverage of ART with a BUY recommendation, target price of S$1.36 based on DCF. Our valuation methodology is based on a risk free rate of 3.9%, risk premium of 5.5% and a terminal growth rate of 0.5% with beta pegged to 0.8x, as per our S-REITs sector peers. The stock is currently trading at an attractive 7.9% FY08 and 8.2% FY09 DPU yield.

ART Q2 distributable income climbs 9.6%

Trust cites organic growth, acquisitions for better results

ASCOTT Residence Trust (ART) said yesterday its second-quarter distributable income climbed 9.6 per cent to $13.3 million, from $12.1 million a year ago.

Distribution per unit was 2.19 cents, an increase of 9 per cent from 2.01 cents in Q2 last year.

The trust said its better performance was due to organic growth across its portfolio – particularly in Singapore and Vietnam – and contributions from properties acquired in the past 12 months.

Revenue for Q2 ended June 30 rose 13.3 per cent to $46 million, from $40.6 million in Q2 2007. In Singapore, revenue per available unit rose some 30 per cent from last year.

For the first six months of 2008, distributable income rose 36.1 per cent to $27.5 million. Distribution per unit rose 25.6 per cent to 4.52 cents. Revenue for the half-year rose 31.6 per cent to $91.6 million.

ART intends to increase its investment in emerging markets such as China, Vietnam and India, said Chong Kee Hiong, chief executive of the trust’s management team. ‘If you look at the current environment, I would say the opportunities are in emerging markets,’ he said.

Right now, the trust has 50 per cent of its $1.5 billion portfolio in emerging markets. Mr Chong said he wants to increase the proportion to 60-70 per cent in the longer term. ART owns 3,550 apartments in 37 properties across seven countries.

The trust said the global financial turmoil triggered by the sub-prime crisis and tighter credit had some effect on the Asian hospitality industry in the first half of this year.

‘Should these factors persist, there will be further impact on business travel patterns to the markets we operate in, although the group’s geographical diversity and extended stay business model allow it to mitigate these factors,’ it said.

The trust’s units rose two cents to close at $1.12 yesterday. The units have shed 22.8 per cent since the start of the year.

2QFY08: DPU up 9% yoy to 2.19 S cents; FY08 annualised yield at 8.1%

2QFY08 DPU grew 9% yoy to 2.19 S cents. With 1QFY08 DPU of 2.33 S cents, 1HFY08 DPU amounted to 4.52 S cents, or 26% yoy higher, translating into an annualised DPU yield of 8.1% vs 10-year Singapore government bond yield of 3.4%. 1HFY08 DPU accounts for 54% of our FY08 DPU forecast of 8.3 S cents. 2QFY08 revenue increased 13% yoy to S$46.0m, mainly driven by Revenue Per Available Unit (RevPAU) growth. All markets except for the Philippines registered positive revenue growth. Acquisitions contributed 5.4% and 6.8% of total revenue and gross profit respectively in 2QFY08.

Overall RevPAU increased 6% yoy to S$143 in 2QFY08, with occupancy rate at a high level of 82% on average. Of its seven markets, Singapore, Australia, Indonesia and Vietnam achieved higher RevPAU growth in 2QFY08. The Singapore and Australia markets achieved double-digit RevPAU growth in the quarter. The China market’s RevPAU was 4% lower yoy as reconfiguration projects generated smaller rooms. The Japan and Philippines markets were hit by increased competition and softening demand.

Gross margin widened to 50.6% vs 45.0% in 2QFY07, but was lower qoq (51.4% in 1QFY08). Yoy margin improvement was mostly due to RevPAU growth and the addition of high-margin rental housing properties in Japan. On a qoq basis, ART’s gross margin was affected by higher labour and utility costs.

Comfortable gearing. ART’s gearing ratio (Debt/Asset) stood at 34.5%, well below the 60% limit allowed by the Monetary Authority of Singapore (MAS) and our optimal gearing assumption of 45%. As of Jul 08, debt that will mature in FY08 amounted to S$85.5m, or 15% of total debt. Management is confident ART has more than enough committed lines to refinance the debt.

Stable outlook. Compared with hotels, the longer-term leases of ART’s portfolio (more than eight months on average) could cushion it against shortterm economic shocks. We also believe corporate travel, the key segment that ART’s service residences target, is more resilient than leisure travel. ART has guided that most markets – including Singapore, Australia, China, Indonesia and Vietnam – could see a stronger 2H08 on a yoy basis, although likely to be weaker compared with 1HFY08 amid uncertainties over inflation and financial turmoil. Japan and the Philippines are expected to continue to be affected negatively by softening demand in 2HFY08. All in all, Management expects operating performance in 2HFY08 to remain stable.

Extensive exposure to diversify currency risks. ART’s extensive exposure in seven countries helps diversify currency risks. According to ART’s estimate, Forex volatility made an impact of only 1%, or S$3m, on gross profit in 1H08. Management still likes the Vietnam market and believes the robust demand for extended stay will lead to a strong operating performance. Management also believes that, as Vietnam portfolio’s room rates are contracted in US dollars, the key risks lie in the time lag for repatriating earnings to Singapore (normally 2-3 months).
ART is a BUY; target price of S$1.57. Our valuation is based on the discounted cash flow model (WACC: 7.3%, terminal growth rate: 2.0%). With FY08 DPU yield estimated at 7.4%, ART’s valuation is very attractive given ART’s unique position as the only hospitality REIT under CapitaLand and its growth potential.

SINGAPORE – Ascott Residence Trust (ART) on Wednesday said that its second quarter distributable income climbed 9.6 per cent to $13.3 million (US$9.83 million), from $12.1 million a year ago. Dividend per unit came to 2.19 Singapore cents, up 9.0 per cent from 2.01 cents for the same period last year.

ART said that its better performance was due to both organic growth across its portfolio, particularly in Singapore and Vietnam, and contributions from newly acquired properties over the past year. On the back of this, revenue for the second quarter rose 13.1 per cent to $46.0 million.