SINGAPORE (Jan 14): OCBC Investment Research is upgrading Ascott Residence Trust (ART) to “buy” from “hold” given the serviced residences REIT managed to sell Ascott Raffles Place Singapore at significantly above its book value.

Ascott REIT divests Ascott Raffles Place for $353.3 mil; 64% above book value

While OCBC was not surprised by the divestment given ART’s active asset recycling strategy, the research house was impressed that ART has managed to sell the property for $353.3 million, which is 64.3% above the valuation of $215 million.

“We continue to like ART’s portfolio of assets with its strong brand recognition and high geographical diversification,” says analyst Deborah Ong in a recent report.

The net gain from the sale is estimated to be $134 million, after decducting expenses. Net sale proceeds will be used to pare down debts, to fund the development of properties such as lyf on-north Singapore, or to fund potential acquisitions.

If the sale had been completed by Jan 1 2017, FY17 DPU would fall 2.4% from 7.09 cents (actual) to 6.92 cents (pro forma). For 9M18, Ascott Raffles Place accounted for 3% of ART’s gross profit. In terms of NAV per share, FY17 NAV per share would increase 4.8% from $1.25 (actual) to $1.31 (pro forma).

As at Sept 30 2018, gearing stood at a reasonable rate of 36.4%. OCBC expects it to decrease to 32% by end 2019 after the divestment is completed and proceeds are used to pay down debt, assuming no acquisitions are made.

ART is currently trading at a 6.3% dividend yield for both FY19F and FY20F. OCBC currently assumes that ART will make additional capital distributions out from net gains till the end of FY19 to smoothen out the loss in distributable income from the divestment.

“After adjustments, our fair value increases to $1.18,” says Ong.

Units in ART last traded at $1.13.