• Standouts: US, Japan, China
• We favour ART’s defensive portfolio
• FV up from S$1.18 to S$1.25

4Q18 DPU Up 5% YoY

Ascott Residence Trust's (ART) 4Q18 results beat expectations. 4Q18 revenue grew 2% YoY to S$136.5m, helped by an additional S$0.4m in revenue from Ascott Orchard Singapore (acquired in Oct 2017), S$2.7m higher revenue from existing properties, and partially offset by a S$1.1m decrease in revenue from divestments. 4Q18 gross profit grew 3% YoY to S$63.4m. 4Q18 DPU increased 5% YoY to 2.15 S cents.

FY18 DPU was up 1% to 7.16 S cents or 106% of our initial full-year forecast, in part due to higher than forecasted capital distributions made during 4Q18. S$6.5m in partial distribution of divestment gains was made in both 4Q17 and 4Q18, and is higher than our assumption of S$1.6m. In terms of distributable income without capital distribution, ART’s FY18 figure of S$148.3m came to 103% of our initial full-year forecast, which we consider above expectations.

Portfolio RevPAU Up 5% YoY

4Q18 portfolio RevPAU grew 5% YoY to S$163, with 8 out of 12 management contract geographies clocking positive RevPAU growth in SGD terms. The following geographies showed negative RevPAU growth YoY in 4Q18: Australia due to currency movements, Indonesia due to ongoing renovations, Malaysia due to weaker leisure demand, and Vietnam due to weaker underlying performance as well as currency movements.

Looking at gross profit, properties in the United States, Japan, and China were standouts, clocking a 16%, 13%, and 9% YoY increase in gross profit in SGD terms, respectively. The US saw higher revenue from the refurbished apartments at Sheraton Tribeca New York Hotel as well as stronger market demand. Japan saw stronger corporate and leisure demand in Tokyo.

China clocked higher gross profit on the back of lower depreciation expense and lower marketing expenses, more than offsetting a 10% decline in revenue due to divestments.

Defensive Portfolio of High Quality Assets

Following a drop in cost of equity drops from 7.5% to 7.3%, our fair value increases from S$1.18 to S$1.25. ART boasts a highly geographically diversified portfolio of high quality assets and given the ongoing macroeconomic uncertainties we look upon this defensive positioning favourably.

Gearing currently stands at 36.7% as at 31 December 2018, with ~80% of ART’s total borrowings on fixed interest rates. Post the divestment of Ascott Raffles Place, gearing is expected to drop to 32+%. This translates into a debt headroom of close to S$1b, and offers ART greater flexibility to pursue DPU accretive acquisitions.

ART is currently trading at a 5.9% FY19F dividend yield. Since our upgrade from Hold to Buy on 10 Jan 2019, ART has posted total returns of 6.4%, beating the Straits Times Index (STI) as well as the FTSE Straits Times REIT Index (FSTREI) by 5.0 ppt and 2.7 ppt respectively.

We maintain BUY with a fair value of S$1.25.

Source: OCBC Research - 30 Jan 2019