Neutral move
- We believe that Ascott Residence Trust’s (ART) proposed acquisitions (one in Australia and six in Japan) that offer a blended EBITDA yield of 5.1% will allow investors to enjoy a positive carry in the long run given the estimated blended cost of debt of 3.44%.
- In the near term, DPU is expected to be diluted due to the lag in deployment of the S$96m raised from the perpetual securities.
- Given this and the continued weakness in Singapore’s and Vietnam’s serviced apartment markets, we tone down our FY15-17 DPU forecasts by 4.4-6.6% and trim our DDM-based (discount rate: 8.5%) target price to S$1.26.
- We maintain our Hold recommendation.
What Happened
- ART has entered into conditional agreements to acquire a serviced residence in Melbourne, the remaining 40% stake in both Citadines Shinjuku Tokyo and Citadines Karasuma-Gojo Kyoto, and four other serviced residences in Osaka for a total consideration of S$246m.
- Through these acquisitions, 1,152 apartment units will be added to ART’s portfolio.
What We Think
- At a total purchase consideration of S$246m, these acquisitions will be largely funded (c.61%) by the proceeds from the recent issuance of perpetual securities, while the balance will be funded by Japanese debt.
- Given the perpetual securities issued at a distribution rate of 4.68%, an average Japanese debt cost of c.1.5% and a blended EBITDA yield of 5.1%, we believe these acquisitions will allow investors to enjoy a positive carry trade, boosting DPU on a proforma basis by 2.9% post acquisitions.
- During the briefing, management highlighted that it aims to keep leverage at c.40%.
- With S$96m of proceeds from the perpetual securities un-deployed, while taking into consideration the 40% target leverage, we believe there could be another acquisition of c.S$120m before the end of this year.
- Assuming the remainder of the S$96m is deployed before the end of the year, coupled with a slowdown in demand for Singapore’s and Vietnam’s serviced apartment markets (both markets cumulatively accounting for 21.3% of the portfolio post acquisition), we have lowered our DPU expectations by 6.6% for FY15 and 4.5% for FY16.
What You Should Do
- Taking into account the recent issuance of perpetual securities, near-term dilution, a slower outlook and these acquisitions, we maintain our Hold rating on ART with a slightly lower target price of S$1.26.
(PANG Ti Wee; LOCK Mun Yee; TAN Xuan, CFA)
Source: http://research.itradecimb.com/
