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In-line results, diversified operations

• 4Q14 DPU +12.8% YoY on adjusted basis
  
• Hedging strategies in place
  
• Resilient business model
  

4Q14 results in-line with our expectations

Ascott Residence Trust (ART) announced its 4Q14 results which came in within our expectations. Revenue increased 13.2% YoY to S$95.0m, while DPU jumped 62.4% to 2.16 S cents. Adjusting for one-off items and a rights issue exercise carried out in Dec 2013, ART’s normalised DPU would have increased 12.8% YoY to 1.76 S cents. For FY14, revenue climbed 12.8% to S$357.2m and formed 100.3% of our estimate. DPU of 8.2 S cents represented a slight decline of 2.4% (normalised DPU +5.8% to 7.61 S cents) but was 0.6% above our forecast.

Watching FX risks closely

As 89.9% of ART’s revenue is derived outside of Singapore, management keeps a close watch on its FX risks, especially in key markets such as Europe, UK and Japan. It has already hedged 70% of its estimated income denominated in Euros in 2015 (at a rate of EUR1 to S$1.63). For its Yen exposure, ART has hedged 20% of its estimated income and has the intention to increase this hedge to ~70%. In terms of capital management, 80% of ART’s total debt is on a fixed rate basis.

Maintain BUY

Looking ahead, although the global macroeconomic environment remains challenging, ART expects its operational performance to remain healthy given its resilient extended-stay business model and geographical diversification. It remains positive on its prospects in Japan given robust occupancy rates and ADR growth in excess of 10% in 2014. ART would be keen to acquire more assets in Japan. China, on the other hand, would be slightly challenging in FY15, but we believe this would be mitigated by contribution from new acquisitions made in FY14. As at 31 Dec 2014, ART’s portfolio comprises 90 properties with 10,502 apartment units spread across 37 cities in 13 countries in Asia Pacific and Europe. We fine-tune our assumptions and roll forward our valuations, thus deriving a higher fair value estimate of S$1.49 (previously S$1.37). Maintain BUY on ART, with the stock trading at FY15F P/B ratio of 0.9x and a distribution yield of 6.6%.

Inorganic driven growth

• 3Q14 DPU +14.7% YoY on adjusted basis
  
  
• Acquisitions to fuel growth ahead
  
• Preferred hospitality REIT
  

3Q14 DPU in-line with our expectations

Ascott Residence Trust (ART) reported a 8.9% YoY increase in its 3Q14 revenue to S$93.7m, but DPU fell 11.0% to 2.11 S cents, as 3Q13 included one-off items amounting to S$1.5m. Adjusting for this and a rights issue exercise, ART’s DPU would have increased 14.7% YoY. Topline growth was largely driven by contribution from acquisitions made in 2014 and organic growth from its existing portfolio to a smaller extent. For 9M14, revenue rose 12.7% to S$262.2m. DPU dipped 14.6%, (but jumped 7.9% after adjusting for one-off items and effects from a rights issue) to 6.04 S cents. This formed 75.5% of our FY14 forecast, and we view this as within our expectations.

Still positive on outlook

Although ART’s RevPAU for its serviced residences declined 4% YoY to S$128 in 3Q14, this was largely due to the acquisitions of two assets in Wuhan and Xi’an, whereby the average daily rates are lower as compared to the tier-1 cities. From a same store perspective, we understand that ART’s RevPAU for its overall portfolio still rose 2% YoY in 3Q14. Looking ahead, management expects its portfolio to remain resilient despite the macroeconomic uncertainties. It has also hedged 70% of its estimated FY14 distribution income denominated in EUR and GBP and ~50% of its JPY exposure for FY14. While ART has yet to put in place FX hedges for its FY15 distribution income, we expect management to pro-actively monitor the situation and enter into forward contracts in the near future.

Maintain BUY

We incorporate ART’s recent accretive acquisitions in our model, and raise our FY14 and FY15 DPU forecasts by 1.9% and 2.2%, respectively. Our RNAV-derived fair value estimate is thus bumped up from S$1.33 to S$1.37. We reiterate BUY on ART, and recommend the stock as our preferred pick within the hospitality REITs sector. We believe its large, diversified portfolio of serviced residences offers better visibility and stability as compared to hotel assets. ART is also trading at an undemanding forward P/B ratio of 0.9x, while FY14F and FY15F distribution yields are attractive at 6.6% and 7.0%, respectively.

Fairly valued

3Q14 gross revenue and DPU came in at S$93.7m (+8.9% yoy) and 2.11 Scts (-10.8% yoy), respectively. This set of results was in line with our estimates, with 3Q DPU accounting for 25% of our full-year estimate and 9M14 forming 72%. Factoring in the recent acquisitions, associated financing costs and perpetual securities issued, we maintain our Hold rating with an unchanged TP of S$1.30 as we tweaked our FY14/15 DPU forecasts by +0.6%/+1.3%.

Higher RevPAU in most markets

Ascott Residence Trust’s (ART) 3Q14 higher revenue was mainly due to the additional contribution from the nine properties acquired during the year. On a same-store basis the top line was flat (+0.3% yoy). DPU was significantly weaker, mainly due to dilution from the new shares issued in Dec 13 and the lack of the one-off distribution of c.S$1.5m made in 3Q13. Revenue per available unit (RevPAU) in 3Q14 for countries with management contracts was generally stronger, with UK and Japan growing by 2% and 10%, respectively, mainly due to strong corporate and leisure demand. Belgium, Spain and Australia posted growth of 15%, 29% and 27%, respectively, as a result of higher demand for refurbished apartments. On the other hand, Singapore and Vietnam posted poorer RevPAU due to lower corporate accommodation budgets while China and the Philippines were weaker due to the repositioning of the portfolio. Indonesia also posted a weaker RevPAU (-3%) this quarter.

Some acquisitions better than others

Although the top line will continue to benefit from the recently-announced acquisitions (three in Australia and one in Japan), we prefer the Australia acquisitions given i) the fixed lease contract, and ii) anticipated yield accretion (funding cost of 5% vs. initial NPI yield of 7.7%). For the Japan acquisition, given i) the initial yield of c.4.5%, ii) estimated capex of S$11m required for the AEI at this property, and iii) associated financing cost (estimated at 3.4-3.8%), we hold a neutral view as we believe the targeted yield of 5% post AEI will have a minimal positive impact on DPU after taking into account management fees.

Maintain Hold

As we believe the full potential from most of the assets acquired this year will not be realised in the near term, the dilution effect is expected to persist. On this basis, we have maintained our Hold rating with unchanged TP of S$1.30.

Expecting better 2H14

• Seasonally softer 1Q14
  
• Portfolio RevPAU flat at S$124
  
• AEIs and acquisitions to propel growth
  

1Q14 results within view

Ascott Residence Trust’s (ART) recent 1Q14 results were within our expectations. Both revenue and gross profit grew by 16% YoY to S$80.4m and S$39.2m, respectively. The growth was bolstered by contributions from the properties acquired in 2013 and improved performance at its existing properties, particularly from United Kingdom, France, Germany and Vietnam. Distributable income was down 3% to S$26.7m due to a one-off realized forex gain of S$8.1m in 1Q13. Together with the rights issue in Dec 2013, DPU eased 22% to 1.75 S cents. While this only meets 22% of our FY14F DPU, we view the results to be in line considering that this is a seasonally softer quarter and performance is expected to improve with new income streams from its announced acquisitions YTD.

Operating metrics mostly positive

For the quarter, RevPAU has remained stable both YoY and QoQ at S$124. However, we note that RevPAU for Japan, United Kingdom and Belgium saw a 18%, 13% and 11% increase respectively, driven by strong demand from corporate and leisure travelers. In Singapore and Vietnam, higher demand from executives on project assignments were also seen, and this has helped to push RevPAU up 6% in both countries. Only Australia and The Philippines were impacted by weaker marker demand and unfavourable forex movements. Nonetheless, as forward contracts to hedge 60%-70% of its estimated income derived in EUR, GBP and JPY were entered, we expect limited volatility in ART’s distribution.

Maintain BUY; fair value unchanged

We also understand that 17%-25% uplift in average daily rates was registered upon completion of the asset enhancement initiatives (AEIs) in 1Q. Looking ahead, management disclosed that it will continue to undertake AEIs to enhance customer experience and maximize returns (S$29.3m costs from 2Q14-2Q15). Coupled with the revenue from its Dalian property (acquired in Mar), Fukuoka property (to complete by Jul)

and possibly new acquisitions in the key gateway cities, we believe 2H14 to be stronger. Maintain BUY with unchanged fair value of S$1.33 on ART.