HOLDING ITS OWN

• 5.1% SG supply CAGR for 2012-2014
  
• Change in corporate contract pattern
  
• Preferred locations
  

Upcoming serviced residence supply

According to CBRE, an estimated seven serviced residences with approximately 783 serviced residence units are expected to enter the Singapore market by the end of 2014. This would bring the potential supply to over 5,765 units by 2014, representing a 5.1% CAGR on 2011 figures. While this is higher than the rate at which hotel room supply is expected to grow over the same period (4.6% p.a., see our CDLHT report dated 27 Aug), we note that occupancy rates for serviced residences is Singapore are stronger than for hotels in general. Serviced residences clocked average occupancy of 91.8% for 2011 (CBRE), versus an average of 86% for hotels (STB), and thus should be able to deal better with increased supply.

Different contract signing pattern

ART’s Singapore properties were responsible for 18.7% of 1H12 gross profit. Having spoken to management previously, we understand that given the current uncertain economic environment, some corporate are effectively staying for the same duration as they did previously in the Singapore properties although they are renewing shorter contracts as opposed to signing longer contracts. While this may partially reduce visibility for ART, we note that higher average rates can be charged because of the shorter contracts.

Good locations

We believe that ART’s Singapore properties will hold their own against upcoming serviced residence supply given their high quality, branding and good locations. Somerset Liang Court and Citadines Mount Sophia are in districts which are not forecasted to see any additional supply between 2012 and 2014. While Dorsett Residence, to be located next to the Outram Park MRT, will provide some competition to Ascott Raffles Place, the latter has the superior location in the heart of the CBD. Given the Additional Buyer’s Stamp Duty, which was announced in Dec 2011, we expect that more non-residents may end up staying in serviced residences over time as opposed to buying their own residential units.

Maintain BUY

We reduce our fair value from S$1.34 to S$1.30 to reflect a weaker Euro but maintain our BUY rating.

RAISING FV WITH GOOD 2Q12

•2Q12 better than expected

•RevPAU grows 6% YoY

•Approval for Cairnhill sale

1H12 DPU in line

ART registered 2Q12 revenue of S$78.9m, up 8% YoY, and gross profit of S$42.7m, up 4% YoY. Revenue growth was chiefly due to contributions from Citadines Shinjuku Tokyo and Citadines Karasuma-Gojo Kyoto as well as better performance from the serviced residences in UK, the Philippines and China. 2Q12 DPU climbed 2% YoY to 2.38 S-cents. 1H12 DPU of 4.52 S-cents was better-than expected, forming 53% of our initial FY12 projection. We raise our FY12 DPU projection from 8.6 S-cents to 9.1 S-cents. The value of the investment properties as of 30 Jun was S$2.9b, up 2.5% versus the last valuation on 31 Dec.

UK, Philippines and China performed well

Revenue per Available Unit (RevPAU) for the portfolio climbed 6% YoY to S$156. In London, good response to the rebranded Citadines Prestige Trafalgar Square London helped ART achieve better rental yields. In the Philippines, ART saw stronger demand from business process outsourcing, O&G and aircraft engineering. The properties in China are experiencing more business from projects and relocations. These three countries helped to offset the weakness in France and Singapore. Singapore saw gross profit declined 5% QoQ to S$7.1m due to disruption from construction activities near to Somerset Grand Cairnhill and higher property tax and operational expenses. The Olympics will provide a boost for the London properties for three weeks in 3Q12, with management seeing occupancies of 85% and average room rates increase of 25%.

Approval for Cairnhill sale

Close to 100% of shareholders voted in favour of the four interconditional transactions involving the sale of Somerset Grand Cairnhill, the purchases of Ascott Guangzhou and Ascott Raffles Place, and a put and call option on a new Cairnhill serviced residence scheduled to be completed in 2015. We have already incorporated the first three transactions into our model. We maintain BUY and raise our RNAV-based fair value estimate from S$1.23 to S$1.34.

Asset swaps not game-changer

We are net-neutral on the divestment of Somerset Grand Cairnhill to Capland for redevelopment. The deal is not a game-changer given marginal near-term accretion, and with longer-term accretion beyond 2017 dependent on future REVPAU and interest-rate trends.

We raise DPUs and our DDM-based target price (disc. rate: 8.5%) to factor in transactions such as the acquisition of the New Cairnhill serviced residences (SR) in 2017 via a mix of debt and perpetuities. Maintain Neutral on limited near-term catalysts and drag from Europe.

What Happened

ART has announced the proposed divestment of Somerset Grand Cairnhill for S$359m (3.8% yield, S$87m gross divestment gain) and the proposed acquisitions of Ascott Raffles Place Singapore and Guangzhou for S$220m (4.1% yield) and S$63m (5% yield), respectively. ART previously secured an OPP to redevelop Somerset Grand Cairnhill: Capland will redevelop the asset as a 40:60 hotel-residential development with higher GFA and divest the hotel portion back to ART on completion (expected in 2017) for S$405m (4.5% yield). The deal is subject to EGM approval on 27 Jul.

What We Think

The asset swaps and perpetuities were not unexpected – we previously highlighted these possibilities. We are net-neutral. We believe ART could have secured better divestment and acquisition pricing and accretion had it divested just the residential portion of the project to third-parties and kept the hotel portion for its own development. This would also allow it to retain a foothold within the Orchard area and to deploy excess divestment proceeds for acquisitions. That said, positives from the current structure come from Capland’s assumption of development risk while the asset is not generating income, and limited time-lag in capital deployment. 4.5% EBITDA yield on redeveloped Somerset Grand Cairnhill looks achievable (see Fig. 4) though accretion will be dependent on future REVPAU and interest-rate trends. Asset leverage should drop to 39.2% (from 41.6% as at end-1Q12) while rising to 43% come 2017 when New Cairnhill SR is acquired through a mix of debt and perpetuities.

What You Should Do

We expect marginal near-term accretion before 2017, when the redeveloped asset is to be reacquired. We maintain Neutral on limited near-term catalysts and Europe drag.

EUROPEAN MASTER LEASES TO UNDERPIN STABILITY

•Defensive master leases in Europe

•Debt maturity well spread-out

•Balanced currency exposure

European master leases to underpin stability

Despite ongoing uncertainty in Europe, we believe that income from ART’s European assets would be underpinned by master leases arrangements in the 17 properties in France and two in Germany, which contributed a total of 26% of gross profit for 1Q12. In addition, management contracts with minimum guaranteed income are in place for seven properties in Belgium, Spain and the UK, which contributed 12% of 1Q12 gross profit.

Bulk of European asset value in prime locations

In terms of asset value exposure, 40% is in Europe of which the bulk is spilt between France (21%) and the UK (15%). Four of 17 French properties in the prime regions of core Paris make up about half of total French exposure. Similarly, in the UK, all four properties are in prime London locations – South Kensington, Trafalgar Square, Convent Garden and the Barbican respectively. This being so, we believe their book values would be relatively resilient and unlikely to suffer long term capital value deterioration.

Debt maturity profile remains healthy

The balance sheet remains healthy with gearing at 41.6% of as end Mar 12. In addition, the debt profile of ART is also relatively well spread-out, with 19%, 9% and 23% of total debt (S$1,170.2m) due in 2012, 2013 and 2014, respectively. Currency exposure is also balanced – with 26%, 32% and 29% of total debt is denominated in SGD, EURO and the JPY, respectively, with the remainder in the Sterling Pound, USD and AUD. Interest coverage is at 3.6 times.

Maintain BUY

With an attractive yield of 7.9%, we continue to see value in the share price. Also, an undemanding P/B ratio of 0.8x would translate to a reasonable margin of safety for bear case write-downs. We maintain our BUY rating with an S$1.14 fair value estimate.