Awaiting acquisitions

• 4Q13 in-line with expectations
  
• Acquisitions probably in Asia
  
• Maintain BUY
  

No surprises in 4Q13

ART announced 4Q13 results that were in-line with ours and the street’s expectations. Revenue climbed 11% YoY to S$83.9m, chiefly due to additional revenue of S$8.3m from the properties acquired in Nov 2012 and on 28 Jun 2013, and better performances from properties in Belgium and France. The increases were partially offset by lower contribution from properties in the Philippines and Japan (weak yen). Gross profit rose 8% YoY to S$41.6m. Unitholders’ distribution increased 15% YoY to S$26.3m. DPU fell 34% YoY to 1.33 S cents due to the Dec 2013 rights issue. Excluding the rights issue, the DPU would be at 1.96 S cents, down 2% YoY.

Outlook for 2014

Management is of the view that on a same-store basis, Singapore SRs will do slightly better than last year, with good occupancies supporting possible ADR increases. However, management notes that the Singapore hospitality sector as a whole will be affected by the new hotel room supply due to come onboard in 2014 and 2015. ART’s properties in Indonesia and Australia which have recently finished renovations should see positive contributions going forward. The key area of concern is still Vietnam, although management believes that the performance of its Vietnam’s properties is bottoming out in local currency terms.

Acquisitions likely in 1H14

We believe that a possible upcoming announcement of acquisitions, e.g. the purchase of Asia-based assets, could serve as a positive price catalyst for ART. Management indicates that it is in advanced negotiations for acquisitions. We assume that around S$350m worth of property yielding ~5.5% will be acquired at the start of 2Q14; ART’s leverage will go back up to around 40%. ART has stated that it is looking for properties in the gateway cities of China, Japan, Malaysia, Australia and Europe. We believe that likely purchases would include Ascott Kuala Lumpur and properties in second-tier cities in China and Japan.

Maintain BUY

We maintain our FV of S$1.33 and BUY rating on ART.

Stability in extended-stay model

ART’s 3Q revenue grew 11% yoy, mainly contributed by acquisitions as same-store revenue growth remains subdued. While there is stability from the extended-stay model and master leases, we expect to growth from acquisition to slow given gearing of 41%. Remain Neutral.

3Q/9M13 DPU met expectations at 26%/78% of our FY13 forecast and 27%/81% of consensus number. We adjust FY14-15 DPU upwards to account for revenue uplift from asset enhancement initiatives (AEI) completion, slightly offset by the reduced contribution from the potential divestment of Somerset Grand Fortune Garden. Our DDM-based target price (discount rate 8.5%) inches up to S$1.31. Remain Neutral based on lack of growth.

Stability in extended-stay model and master leases

Rental income contributed by more than 12 months stay increased from 17% to 21% qoq due to the acquisition of 11 rental housing in Japan in June 2013. The extended-stay model, coupled with the 31% gross profit from master leases, provides stability but could limit growth for the portfolio in the long term.

Leverage limits acquisition

Asset leverage is currently at 41%. ART’s recently announced sale of Somerset Grand Fortune Garden is estimated to provide c.S$85m of capital, but we estimate leverage to only decrease slightly to 38% upon the sale. This is still high compared to peers of 32%, making acquisitions of c.S$300m per year, such as that in 2011 and 2012, unlikely without further capital raising.

AEI as avenue for growth

ART undertook c.S$24m of AEI in FY13, which has translated into 20-35% higher average daily rate for the renovated apartments. Additional revenue from the refurbished rooms should contribute to FY14 earnings as most AEIs have been completed, but effect on distributions should be less than 1%. With most of the portfolio assets being at least 10-20 years old, we see AEI as the driver for ADR uplifts.

3Q13 ahead of expectations

• Acquisitions drive growth
  
• JPY depreciation
  
• Raise FV to S$1.39
  

3Q13 beats expectations

ART announced 3Q13 results that were ahead of ours and the street’s expectations. Revenue climbed 11% YoY to S$86.1m, chiefly due to additional revenue of S$14.1m from the properties acquired in second half last year and on 28 Jun 2013. The increase was partially offset by the decrease in revenue of S$4.7m from the divestment of Somerset Grand Cairnhill in Sep 2012 and lower contribution of S$0.7m from the existing properties, mainly properties in Philippines (lower corporate demand and ongoing renovation of Ascott Makati) and Japan (due to the depreciation of the JPY against SGD). Gross profit climbed 10% YoY to S$44.8m, although on a same store basis gross profit fell S$0.9m YoY. Unitholders’ distribution increased 17% YoY to S$30.0m. In 3Q12, unitholders’ distribution included a S$2.0m reversal of over-provision of prior years’ tax expense. Excluding this, YoY growth would be 27%. DPU rose 6% YoY to 2.37 S cents, bringing 9M13 DPU to 7.07 S cents, versus full year estimates of ours and the street of 8.9 S cents and 9.0 S cents respectively.

Weaker performance in Philippines and Japan

The group achieved a RevPAU of S$133 in 3Q13, a decrease of 10% as compared to 3Q12. The decrease in RevPAU was mainly due to divestment of Somerset Grand Cairnhill Singapore and weaker performance from Philippines and Japan (due to depreciation of the JPY).

AEI progressing according to plan

The first phase of refurbishments at Citadines Toison d’Or Brussels and Somerset Xu Hui Shanghai have been completed as at end 3Q13. Citadines Ramblas Barcelona, Ascott Jakarta, Ascott Makati Philippines, Somerset St Georges Terrace Perth and Citadines Toison d’Or Brussels (Phase two) are undergoing refurbishment.

Maintain BUY

Adjusting our assumptions, our FY13F DPU forecast increases from 8.9 S cents to 9.1 S cents and our FV increases to S$1.39 from S$1.37. We maintain our BUY rating on ART.

Eurozone recovery and positive FX movements

• Eurozone is improving
  
• FX directions should help ART
  
• Upgrade to BUY
  

Eurozone’s weak recovery

Business activity in the Eurozone rose to a 27-month high, according to closely-watched data from London-based Markit Economics released yesterday (23 Sep). Germany led the region with good new business and employment gains. Various economic data is pointing towards weak recovery in the Eurozone. Gradually this should translate into better leasing prospects for ART’s European serviced residences.

2Q13 in line with street

To recap, Ascott Residence Trust (ART) reported 2Q13 results that were in line with the street. Revenue fell 2% YoY to S$77.4m due to the divestments and lower contribution from existing properties. RevPAU contracted 9% YoY to S$142 and this was due mainly to the divestment of the Cairnhill property and weaker performance from China and Japan. Gross profit dropped 4% YoY to S$41.0m. However, unitholders’ distribution grew 14% YoY to S$30.9m (including a reversal of over-provision of prior years’ tax expense of S$2.7m), which led DPU up 3% YoY to 2.45 S cents. Excluding the placement units issued in 1Q13, DPU for 2Q 2013 would be 2.70 cents.

Foreign currencies to help gross profit

During the 2Q13 analyst briefing, management expressed that it believed that the whole portfolio’s RevPAU for 2H13 will be flat or slightly higher than 1H13, assuming that exchange rates stay constant for the rest of the year. We analyzed movements in the average spot exchange rates for the various currencies in which ART receives its revenue in. Assuming flat RevPAU/rental income in local currency terms on a HoH basis for 2H13, we note that the overall exchange rate movements for 2H13 so far could actually increase ART’s gross profit by ~1.0% HoH, chiefly due to improvements in EUR and GBP versus the SGD. Assuming no change in the asset values in local currency terms, we estimate a ~0.8% increase in portfolio value. Going forward, ART’s geographically diversified portfolio in this volatile environment will provide some resilience to negative FX movements.

Upgrade to BUY

Since the unit price of ART has fallen 13.4% since we downgraded the REIT on 24 Jan, we believe that ART is undervalued at current levels, with an attractive yield of 7.6% for FY14E. We maintain our FV of S$1.37 and upgrade ART from Hold to BUY.

Meeting growth expectations

• Anticipated acquisitions to refocus its exposure into high growth Asia
  
• Accretive to earnings
  
• BUY, S$1.53 TP
  

Anticipated acquisitions to expand its Asian exposure. Ascott Residence Trust (ART) is proposing to acquire 3 serviced residences properties in China and 11 Rental Housing Properties in Japan for S$287.4m from its sponsor, Ascott Group. The properties will be acquired at a slight discount to valuers’ valuation and the purchase price implies an initial EBITDA yield of 5.4%.

Positioning to high growth Asia. The proposed acquisitions will increase its exposure in Asia to 63% of asset value. The China properties will form close to 60% of the total deal size and will strengthen its presence in Shanghai (Citadines Biyun Shanghai) while expand its footprint into new cities of Shenyang (Somerset Heping Shenyang) and Suzhou (Citadines Xinghai Suzhou). The manager expects its portfolio in China to deliver a RevPAU growth of c5% in FY13. The Japan rental housing properties on the other hand, offers stability as 5 out of the 11 properties are tied to master-leases with tenures of 5-8 years while the remainder are backed by rentals, with tenancies averaging 1-2 years.

Accretive to earnings, BUY with S$1.53 TP. With clarity on the use of its recent placement proceeds, we see an overhang on the stock being removed. Maintain BUY and TP S$1.53 on ART. Based on an EBITDA yield of 5.4%, which is higher than the implied funding cost of 4.9%, DPU is expected to be lifted by c2.9%. Gearing is expected to head up to 41% post acquisition.