SINGAPORE (April 24): OCBC is viewing the divestment of 18 rental housing properties in Japan by Ascott Residence Trust positively given that it is a strategic recycling of assets.

The research house is thus reducing its fair value to $1.09 with a “hold” after tweaking its RevPAU growth assumptions for the various markets.

“We assume the divestment of the 18 rental housing properties in Japan will be completed in Mid-May, and adjust our revenue and gross profit assumptions accordingly,” says lead analyst Deborah Ong in a Monday report.

Following the rights issue, Ascott Orchard Singapore (AOS) acquisition, German acquisitions and the divestment of Japan properties, Ascott REIT’s gearing would be 36.6%.

In 1Q17, AREIT’s revenue increased 5.4% y-o-y to $111.3 million, mainly due to additional revenue of $5.8 million from the acquisition of Sheraton Tribeca New York last year which was partially offset by the decline in revenue of $1.8 million from existing properties, mainly Singapore and the UK.

Gross profit fell 2.9% y-o-y to $47.2 million despite the increase in revenue largely due to the recognition of operating lease expense on a straight-line basis in the United States.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/keppel-corporations-acquisition-aermont-capital-checks-all-boxes?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Keppel Corporation’s acquisition of Aermont Capital ‘checks all boxes’</a>

“We note that 1Q tends to be a seasonally much weaker quarter for the US assets,” says Ong.

The amount distributable to unitholders dropped 8.0% y-o-y to $25.1 million, while DPU dropped 13.7% y-o-y from 1.75 cents in 1Q16 to 1.51 cents in 1Q17.

“This makes up 24.7% of our full-year DPU forecast, and we consider the results to be within expectations.” says Ong.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/maybank-cuts-target-price-lhn-45-cents-54-cents?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Maybank cuts target price for LHN to 45 cents from 54 cents</a>

Stripping out the net realised exchange gain of $3.0 million, 1Q16 DPU would have been 1.57 cents.

Ong notes that Singapore RevPAU decreased 11% y-o-y from $220 in c1Q16 to $196 in 1Q17, mainly due to weaker market demand and a reduction in corporate accommodation budgets.

“This was within our expectations for a high single-digit to low double-digit decline in Singapore RevPAU this year,” says Ong.

“Going forward, we look to continued strong RevPAR growth in Vietnam and the Philippines following the refurbishments at Somerset Ho Chi Minh City and Somerset Millennium Makati.”

Units of Ascott REIT are trading at $1.09.

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