• EBITDA yield at 5.1%
• Pro forma DPU up 1.2%
• Gearing to reach 40%

Acquires three assets in Malaysia and China

Ascott Residence Trust (ART) announced yesterday that it has entered into a conditional agreement to acquire its first serviced residence in Kuala Lumpur, Malaysia from its sponsor The Ascott Limited for MYR175m (S$67.4m). It also proposed to acquire two serviced residences in Wuhan and Xi’an in China from Ascott Serviced Residence (China) Fund, in which Ascott holds a 36.1% stake, for S$106.5m. At a total property value of S$173.9m, management estimates the blended EBITDA yield to be 5.1% and expects the acquisitions to increase its pro forma FY13 DPU by 0.1 S cents or 1.2%. This is in line with our acquisition yield of 5.5% we have projected for transactions made by ART in 2014 in our view, given that operating metrics at the three assets have improved over the past year.

Investment merits of the properties

We understand that the Malaysia property is strategically located in the prime Golden Triangle of nation’s capital city – a major business, shopping and entertainment hub, and enjoys good inter-city and intra-city connectivity. ART is upbeat that the property is well positioned to benefit from the expected increase in corporate activities, which have already seen foreign direct investment rose by 25% in 2013. Management also believes Wuhan and Xi’an properties will enable ART to expand its footprint in China and tap into robust growth in these cities. All three properties, we note, are new as they are only opened in 2011.

Maintain BUY

ART intends to fund the acquisitions wholly by debt from its existing debt facilities, which should increase its gearing ratio from 35.9% as at 31 Mar 2014 to c. 40.2% upon completion of the transactions. This would also effectively utilize all the proceeds from its rights issue raised in Dec 2013. As the acquisitions constitute interested party transactions, ART will have to seek unitholders’ approval at an EGM to be held on 31 Jul 2014. We are making minor adjustments to our forecasts, and keeping our fair value of S$1.33 intact. Maintain BUY on ART.

Source: OCBC Research - 8 Jul 2014