CFA Society Singapore
SINGAPORE (Jan 30): Despite Maybank Kim Eng and consensus maintaining Ascott Residence Trust (ART) given its disappointing DPU performance over the past few years, DBS Group Research is maintaining its “buy” call on the REIT.
While acknowledging the Street’s concerns, DBS analyst Mervin Song says what drives ART’s share price is the REIT’s strategy of selling properties that have limited growth potential and recycling the proceeds into better-yielding assets.
This ability translates to selling its properties above book value while at the same time reduce its reliance on equity raising to drive growth, warrants ART to trade above its book value as implied in DBS’s $1.35 target price, says Song.
Maybank, on the other hand, expects ART’s returns-and-risk profile will continue to be influenced by global macros, while its 2% DPU CAGR lags peers.
“We prefer CDL Hospitality Trusts ($1.60, TP $1.80) and Far East Hospitality Trust (63 cents, TP 75 cents) which are better leveraged to a Singapore RevPAR rebound,” says analyst Chua Su Tye.
In 4Q18, ART’s revenue and gross profit rose 1.5% y-o-y and 2.5% y-o-y as contributions from its existing properties and a full-quarter accretion from Ascott Orchard in Singapore acquired Oct 2017 helped offset divestments in Shanghai and Xian. Gross profit from its stable income was flat when a rent reduction for renewal of its French master leases was offset by stronger demand in Singapore and Spain.
Growth income from management contracts rose 4.8% y-o-y/3.6% q-o-q with stronger contributions from US, Japan and Singapore on improving RevPAUs.
Singapore revenue rose 6.7% y-o-y on stronger RevPAU, up 7.0% y-o-y, but gross profit fell 7.4% y-o-y on higher staff costs and marketing expenses. ART is planning to deepen its Singapore core over the medium term with its maiden co-living development property at one-north set to open in 2021.
Meanwhile, the Ascott Raffles Place divestment at a 3% cap rate is targeted to be completed in May. The transaction, together with other recent deals, continues to support a positive sector growth outlook on the back of demand recovery and tapering 2018-2021 supply.
Management is focused on acquisitions in Australia, Europe and US and looks to accelerate growth to increase its developed markets exposure as it eyes inclusion in the NAREIT index to boost trading liquidity. Aggregate leverage at 36.7% as at end Dec 2018 could improve to 32% from its divestment proceeds, implying $1.0 billion in debt headroom.
“After the better than expected 4Q18 results, we raised our DCF-based TP to $1.35 from $1.25,” says DBS’s Song.
Units in ART closed flat at $1.19 on Wednesday, giving a dividend yield of 6.1% for FY20F.