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Attractive yields, Ascendas merger and healthy gearing make ART attractive

PC Lee
PC Lee • 4 min read
Attractive yields, Ascendas merger and healthy gearing make ART attractive
SINGAPORE (Aug 2): Ascott Residence Trust, the provider of serviced residences, rental housing properties and other hospitality assets, reported improved 2Q19 results that came in line with the forecasts of most research houses.
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SINGAPORE (Aug 2): Ascott Residence Trust, the provider of serviced residences, rental housing properties and other hospitality assets, reported improved 2Q19 results that came in line with the forecasts of most research houses.

In 2Q19, ART reported an 8% rise in both distribution income of $43.1 million and DPU of 1.98 cents from a year ago, which included a one-off realised exchange gain of $3.1 million compared to a realised exchange loss of $6.5 million a year ago. On a half-year basis, ART reported a DPU of 3.43 cents, up 8.0% from a year ago.

Excluding one-offs, ART’s 2Q19 DPU would have come in lower at 1.84 cents for 2Q19 and 3.17 cents for 1H19.
The DPU increase was mainly driven by higher revenues and gross profits which increased by 2% and 7% to $132.5 million and $67.7 million respectively. Gross profit was driven by a 15.7% y-o-y rise in its management contracts and stronger RevPAUs in Europe, Japan, Singapore, the Philippines and Vietnam.

In 2Q19, revenue increased 1.5% to $132.5 million due to the acquisition of Citadines Connect Sydney Airport and higher revenue from existing properties in the Philippines; growth from corporate and leisure demand in the United Kingdom; and strong leisure demand in Japan, says UOB KayHian. The topline increase was also supported by a $3.1 million gain from repayment of foreign currency bank loans using divestment proceeds from Ascott Raffles Place Singapore.

Portfolio RevPAU rose 1.9% y-o-y due to stronger performances from ART’s properties in the United Kingdom, Belgium, Spain, China, Japan, Vietnam and Singapore. These included maiden contribution from Citadines Connect Sydney Airport which was completed in May, strong showing from the recently refurbished Ascott Makati in the Philippines and the completion of asset-enhancement initiatives in Element New York Times Square West and Somerset Grand Citra Jakarta.

Country-wise, Singapore operations, which contributed 10% of 2Q19 gross profits, seemed to be stabilising despite posting a 11% drop in revenue in local currency terms due to the sale of Ascott Raffles Place. Properties under management contract -- Somerset Liang Court and Citadines Mount Sophia – saw gross profit come in flat on the back of a 2% rise in revenue, driven by a 2% rise in RevPAU to $194/night. This is a positive development after quarters of being under pressure due to lower supply, says DBS Group Research in a flash note on Wednesday.

In Japan, ART’s properties continued to see strong demand in its buildup to the 2019 Rugby World Cup and 2020 Olympics. Accounting for 12% of 2Q19 gross profit, its operations there posted a 5% rise in revenue on the back of a 8% rise in RevPAU to JPY13,238/night ($167/night).

Its UK portfolio, which contributed 10% to gross profits, is expected to stay resilient despite Brexit and supply growth worries as the properties are under management contracts with minimum guaranteed income, says UOB KayHian. Demand drivers include the weak pound, as well as events such as Wimbledon and the biennial Defence and Security Conference in 3Q19, it adds.

At 20% of gross profit, ART’s three US hotels continued to deliver steady returns although RevPAU declined by 1.8% y-o-y to $240/night. Excluding the accounting effects of FRS 116, gross profits would have declined 3% instead of the 46% rise reported.

ART’s balance sheet also remained under-geared.
As at end 2Q19. gearing stood at 32.8% with an effective interest cost of 2.1%. Based on a ceiling of 45%, ART has potential headroom of $1.1 billion to tap acquisition growth opportunities, says CGS-CIMB Research. Potential locations include Australia, UK and the US. Balance sheet metrics are robust with 88% of its debt on fixed rates and low refinancing needs in 2019.

ART’s management has reaffirmed its commitment to DPU growth from acquisitions and appeared to favour the stable characteristics of properties in developed markets, says Daiwa Capital Markets. In fact, although ART has a right-of-first-refusal for 20 assets owned by its sponsor, management indicated interest in potential third-party acquisitions.

Among the research houses, DBS looks forward to the conclusion of the merger between Ascendas Hospitality Trust and ART as the benefits of an enlarged combined entity will drive liquidity and investor interest in the stock in the longer term.

“The impending merger with AHT provides DPU accretion of 2.5%,” says UOB in a recent report.

As the combined entity should see its free float increase by 50% to $2.4 billion and EBITDA from developed markets expand to 82% on a pro-forma basis for 2018, UOB says the possible inclusion in a major property index (EPRA NAREIT Developed Asia Index) is also a tempting prospect in the medium term.

Daiwa is maintaining its “outperform” on ART with $1.34 target price. DBS and UOB are maintaining a “buy” with $1.45 and $1.54 target prices respectively while CGS-CIMB and Maybank are maintaining a “hold” with $1.31 and $1.30 targets respectively.

As at 3.12pm, units in ART units are trading 1 cent higher at $1.33.

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