Ascott Trust Q1 payout per unit up 47%

ASCOTT Residence Trust (ART) achieved a unitholders’ distribution of $14.17 million for the first quarter ended March 31 – a 76 per cent rise from a year earlier. And distribution per unit (DPU) rose 47 per cent to 2.33 cents.

The trust said its serviced residences continued to benefit from strong demand for accommodation from business travellers in Asia. The improved operating performance of its properties and contributions from new acquisitions also boosted its performance.

Serviced residences posted 15 per cent growth in revenue per available unit (RevPAU) overall, led by a strong RevPAU increase of 29 per cent in Singapore and higher RevPAU in China, Indonesia, the Philippines and Vietnam.

In addition, rental housing properties in Tokyo have performed well since they were acquired in December last year, achieving average occupancy of about 90 per cent, according to ART.

‘We will continue to focus on maximising asset yields to drive organic growth and making yield-accretive acquisitions to deliver stable and growing returns to unitholders,’ said Lim Jit Poh, chairman of Ascott Residence Trust Management Ltd.

Added Chong Kee Hiong, ARTML’s chief executive officer: ‘Our strategy of maintaining a balance of properties in stable as well as emerging markets in the Pan-Asian region will continue to provide a high degree of income stability for the portfolio.’

Upon completion of its latest acquisition in Perth, expected in the current Q2, the trust’s portfolio will expand to $1.52 billion, comprising 37 properties with 3,550 units in 11 cities across seven countries.

Good start to the year

• 1QFY08 results above expectations. Gross revenue of S$45.6m was up 58% yoy on strong REVPAU growth, particularly in the Philippines (+36%) and Singapore (+34%); and contributions from 18 rental housing apartments in Japan acquired last year. Reported revenue was slightly below expectation (22% of full-year forecast) due to a seasonal first-quarter lull in China, the largest income contributor (22% of gross revenue). However, distribution income of S$14.2m and DPU of 2.3cts came in above Street (26% of full year) and our estimates (28% of full year) on lowerthan- expected operating costs and interest expense, and higher non-tax
deductibles.

• Gross operating margins higher than forecast. Gross operating margins were 51%, or 5% pts above our forecast of 46% for 2008. Strong REVPAU growth coupled with the introduction of higher-margin rental housing in Japan and overall cost efficiencies accounted for the improvement.

• Income stream expected to remain stable. Expected slower economies and higher inflation rates in Asia (including Singapore, China, Japan and Vietnam) are likely to affect the hospitality industry in Asia. However, contributions from ART’s portfolio should remain stable, as: 1) 52% of its income comes from the long-stay segment of six months to beyond 12 months; 2) ART has a geographically diverse portfolio which reduces risk concentration; and 3) hotel supply in some Asian markets, particularly Singapore, the Philippines, and Vietnam, is tight. These are ART’s significant markets.

• Forecasts unchanged; maintain Outperform and target price of S$1.74. Our DDM-derived target price (discount 8.4%) stays at S$1.74. At current price levels, ART offers a prospective total return of 45.7% from a 6.5% yield and 39.2% potential price upside.

1Q08 DPU up 46.5% yoy to 2.33 S cents

Ascott Residence Trust (ART) posted 1Q08 revenue of S$45.6m, 58% higher yoy. This is driven by both acquisitions and strong organic growth. Acquisitions made after 1Q07 contributed S$12.7m revenue and S$7.1m net property income (NPI), 27.8% and 30.3% of total revenue and NPI respectively.

The serviced residences registered strong Revenue Per Available Unit(RevPAU) growth, 15% up from S$123 in 1Q07. As expected, Singapore portfolio enjoyed the strongest organic growth in 1Q08, with RevPAU increasing by 29% yoy to S$251.

Distribution per unit (DPU) increased 46.5% to 2.33 cents. This translates into an annualized DPU yield of 7.5%, compared with 10-year Singapore government bond yield of 2.3%.

We have a BUY rating on ART with target price at S$1.77. We will have a detailed analysis later.

A Pedigree Pan-Asian Hospitality Play

Stable earnings underpinned by diversified asset portfolio. Ascott Residence Trust (ART) owns 37 properties, with 3,550 serviced residence/rental housing units, spread across 11 cities and seven Asia-Pacific countries. Its diversified regional exposure in both emerging and mature markets ensures stable earnings. Compared with hotels, the relatively longer-term leases of ART’s portfolio cushion it against short-term economic shocks. Excluding Revenue Per Available Unit (RevPAU) growth, we expect ART’s existing asset portfolio to offer a floor DPU yield of 5.9% and 6.1% in 2008 and 2009 respectively.

Potential S$300m asset acquisitions in 2008. ART’s ability to execute acquisitions can be seen from the over S$500m worth of acquisitions it has made since Mar 06. With a low gearing of 33.1%, ART can fund yield-accretive acquisitions of up to S$300m through debt (assuming debt/asset ratio of 45.0%) without having to tap the equity market. With RevPAU growth and S$300m worth of asset acquisitions, ART’s DPU yield will improve to 6.5% and 7.4% in 2008 and 2009 respectively .

Pedigree enhanced by CapitaLand’s TAG privatisation. ART has the right of first refusal to its sponsor The Ascott Group’s (TAG) serviced residence/rental housing assets in Asia-Pacific. TAG is the largest serviced residence owner-operator outside of the US. Its extensive exposure in Asia-Pacific provides a potential pipeline for asset injections into ART. The privatisation of TAG by its parent, CapitaLand, will increase the latter’s effective stake in ART from 37.3% to 46.6%. This streamlining of CapitaLand’s hospitality segment will strengthen ART’s importance in the Group and thus boost its potential for value creation for CapitaLand.

Initiate coverage with BUY and target price of S$1.77. Our target price of S$1.77 is on a par with our DCF valuation per share (WACC: 6.9%; terminal growth rate: 2.0%). ART is trading at a 27.7% discount to our target price and a 20.0% discount to ART’s 2007 NAV of S$1.60/share. Our earnings forecasts have not factored in other acquisitions besides the S$300m assumed for 2008. Risks include a sharp economic downturn in Asia, an inability to raise cheap debt, prolonged downturn in equity markets and competition in asset acquisitions.

Investment summary

• Good exposure to high-growth Asian hospitality markets. ART is a serviced residence real estate investment trust focusing on serviced residences and rental housing markets in Asia. With strong FDI inflows into the region and growing interest in Asia as a new hub for business, leisure and events, demand for serviced residences should be well supported.

• Balanced portfolio reduces seasonal fluctuations. The length of stay at ART’s properties is above the industry average, given ART’s target market of business and leisure travellers, as well as residential tenants. This largely reduces the earnings fluctuations commonly seen in the short-stay hospitality sector.

• Strong sponsor to aid acquisitions. ART is supported by a strong sponsor, The Ascott Group, which has 11,515 serviced residence units and rental housing units (including properties managed, leased, partially or wholly-owned by Ascott) which could be available for injection into ART.

• Low asset leverage positive in current market. ART’s asset leverage as at end-2007 was 33.1%, below its long-term gearing target of 45% and well below the regulatory limit of 60%. This would enable it to achieve its S$2bn asset target by end-2008 through acquisitions without the need to seek funding in capital markets.

• 9% DPU CAGR for 2008-10. ART is poised for growth via acquisitions and growth in revenue per available unit (REVPAU) from 2008 to 2010. We expect ART to acquire S$400m of properties in 2008, to reach a target portfolio of S$2bn by end-2008. In addition, its REVPAU is expected to increase by 3-8% across the region from 2008 to 2010. On this basis, we forecast a DPU CAGR of 9% for 2008-10.

• Initiate with Outperform and DDM-derived valuation of S$1.74. We arrive at our target price of S$1.74 using DDM valuation (discount rate at 8.4%, terminal growth rate at 3%). This represents a total return of 45% from a forward yield of 6.5% in FY08 and potential price upside of 38%.