• Excluding one-off items, DPU down 4%
• Inorganic growth remains important
• Lower cost of equity

FY16 results in line with expectations

Ascott Residence Trust (ART) posted results in line with our expectations. FY16 revenue increased 12.9% to S$475.6m (98.2% of our forecast), boosted by a S$75.9m contribution from FY15/FY16 acquisitions and partially offset by a decrease in revenue from 3Q15 divestments and from existing properties.

DPU rose 3.5% to 8.27 S cents (103.2% of our full-year forecast), boosted by a one-off net realized exchange gain of S$8.8m. Excluding one-off items, ART’s adjusted DPU came up to 7.73 S cents (-4.1% YoY). FY16 RevPAU climbed 5% to S$140; on a same-store basis, excluding the 2015 and 2016 acquisitions, RevPAU fell 7%.

Asset recycling and acquisitions still key

Our channel checks in Singapore have relayed that, given the uncertainty surrounding Trump’s economic policies, some foreign corporates (USbased and otherwise) are taking a wait-and-see approach when it comes to making business decisions and investments. Looking forward to 1H17, we believe inorganic growth and welltimed divestments remains an important strategy for hospitality REITs as serviced residence demand looks to be affected by cautious attitude of corporates, at least until further policy certainty. For ART, we note that Ascott Orchard Singapore opened in Dec 2016 and is on track for delivery in 2H17.

Lowered cost of equity from 7.9% to 7.7%

We pare our FY17 DPU forecast from 8.20 S cents to 7.55 S cents as we update our currency parameters and factor in lower RevPAU growth rates for ART’s assets in different cities: Singapore, given the weak corporate demand outlook; New York City with keen hotel room competition; London with the upcoming implementation of Brexit. We believe that contributions from Japan, which made up 16.9% of ART’s FY16 gross profit, will continue to be resilient.

With the change in covering analyst, we lower our cost of equity assumption from 7.9% to 7.7%, after a beta adjustment and taking into account a higher risk-free rate of 2.7% (previously 2.4%). As a result of the above changes, our fair value drops from S$1.24 to S$1.22. Against yesterday’s price of S$1.185, ART is trading at a forward FY17 yield of 6.4%. We downgrade ART from a Buy to a HOLD as we now see limited upside potential.

Source: OCBC Research - 25 Jan 2017