• 1Q15 DPU up just 0.6% YoY
• Japan the star performer
• Lower forecasts but maintain BUY

1Q15 results fell short of our expectations

Ascott Residence Trust (ART) reported 1Q15 results which missed our expectations. Revenue grew 12.0% YoY to S$90.0m, driven by additional contribution from new properties acquired in 2014. This formed 22.3% of our fullyear forecast. Excluding acquisitions, we estimate that ART’s gross revenue slipped 3.7% YoY, with the drag coming from China and FX translation impact from a weaker EUR and JPY. Overall portfolio RevPAU dipped 8% YoY to S$114/day, but on a same store basis (excluding the 2014 acquisitions), ART’s RevPAU fell 2%. DPU for 1Q15 inched up by 0.6% YoY to 1.76 S cents, and this made up 20.8% of our FY15F estimate.

Conditions likely to get better

Despite the soft start by ART, we expect a stronger performance by ART ahead, as 2Q and 3Q are the peak periods for its portfolio. While its assets in Dalian and Indonesia were affected in 1Q15 by the downturn in the oil and gas sector, we note that oil prices have since rebounded. Hence, some projects which were previously delayed have now restarted and ART has seen an improvement in occupancy rates in Apr and corporate bookings in May in these areas. Although China would likely remain challenging in 2015, this is partly caused by the ongoing refurbishment at Somerset Xu Hui Shanghai and Somerset Olympic Tower Property Tianjin. Japan was the star performer for ART in 1Q15 (RevPAU grew 17% in local currency terms), and we expect its robust contribution to continue, underpinned by a rebranding exercise carried out on one of its properties and healthy demand from both corporate and leisure guests. Management has hedged 70% of its estimated distribution income denominated in JPY in 2015, while 70% and 80% of its EUR and GBP distribution income have also been hedged, respectively.

Maintain BUY

Looking ahead, management has plans to grow its asset portfolio size from S$4.1b to S$6.0b by 2017. We trim our FY15 and FY16 DPU forecasts by 2.3% and 2.5%, respectively, and our fair value estimate consequently drops from S$1.49 to S$1.44. We are maintaining our BUY rating given ART’s still attractive FY15F DPU yield of 6.5%.

Source: OCBC Research - 29 Apr 2015