SINGAPORE (June 29): CIMB has maintained its “hold” call for Ascott Residence Trust (ART), with a target price of $1.16, according to a report dated Tuesday.

ART provides unique exposure to the corporate long-stay segment through its serviced residences (SRs), currently comprising 90 properties with 11,667 units in 38 cities spread across 14 countries. Describing SRs as a resilient accommodation model, the research house believes that demand for SRs will continue to rise with increased awareness of their value propositions.

Unitholders of ART are also able to enjoy income stability as the average stay of ART’s SRs is around four months as compared to the more volatile nature of hotel stays. Moreover, ART’s master leases and management contracts with minimum income also support income stability, contributing about 46% to ART’s gross profits in FY15.

The research house also notes that the corporate segment within the Asia-Pacific region contributes about 80% of total rental income, thus allowing ART to benefit from earnings upside from these properties.

However, DPU has not grown in tandem with AUM expansion. Even though ART’s AUM posted a CAGR of 11% from 2010 to 2015, asset expansion has not been accompanied by DPU growth. This is due to its high gearing that resulted from acquisitions being financed through a mixture of equity and debt.

Hence, even as ART seeks to grow its AUM to $6 billion by 2017, the research house believes that DPU accretion will be slight, especially as its gearing is expected to rise to 40.2% in the aftermath of the acquisition of Sheraton Tribeca.

The Brexit fallout could only cast a pall over ART’s properties in UK and Europe. The research house notes that ART does not hedge its pound-denominated income although about 70% of its Euro income is hedged. However, downside is limited due to ART’s increasing exposure to US assets.

In addition, the group’s assets in the UK and Europe are either on master leases or management contracts with minimum guaranteed income, thus providing a degree of income stability during ongoing uncertainties in the market. Hence, the research house believes that near-term risk is mainly from translation losses on pound-denominated income.

Lastly, the research house projects flat FY16 DPU growth due to sluggish contributions from Europe, Asean and an expanded unit base from the private placement completed in Mar 16. RevPAU outlook is also expected to be sluggish in ASEAN and Europe while the Philippines will be affected by ongoing AEIs. China, ART’s biggest market, is expected to post only 1% RevPAU growth.

As at 12.30pm, ART was up 0.9% at $1.10.