• Landmark merger with Ascendas Hospitality Trust
• Positive terms for unitholders
• Watch out for possible index inclusion

Terms of the Merger

Ascott Residence Trust (ART) and Ascendas Hospitality Trust (AHT) jointly announced a proposed combination, which will result in the combined entity becoming the largest hospitality REIT in Asia Pacific and the seventh largest trust listed on SGX with an asset value of S$7.6b. The combination will add AHT’s 14 hotels in Asia Pacific to ART's portfolio, creating an enlarged portfolio of 88 properties with more than 16,000 units in 39 cities and 15 countries.

The combination will be effected by way of a trust scheme of arrangement, with ART acquiring all the AHT units for S$0.0543 in cash and 0.7942 ART stapled units, per AHT unit. The total consideration is S$1,235.4m, comprising S$61.8m in cash and 902.8m new ART stapled units.

Impact to ART Unitholders

The pro forma DPU for ART would have increased 2.5% from 7.16 cents to 7.34 cents and the pro forma DPU for AHT would have increased 1.8% from 6.03 cents to 6.14 cents. On an adjusted pro forma basis, ART’s NAV per unit post-merger is expected to be neutral at S$1.22.

ART’s postmerger gearing is expected to be 36.9%, which represents a debt headroom of S$1.0b to the current limit of 45%. We deem the terms of the merger positive for ART unitholders. We estimate that the post-transaction fair value of the merged entity should lie at ~S$1.31 per unit (assuming a 7.5% valuation premium for the merged entity).

As we do not cover A-HTRUST, the above calculations are based on the Bloomberg consensus fair value of S$0.98 for AHTRUST.

On Valuation Premium and Other Synergies

We see our 7.5% valuation premium as reasonable given that the merger could facilitate inclusion into the FTSE EPRA Nareit Developed Index. In addition to the valuation premium, we do note that there may be portfolio synergies for the merged entity, notably in terms of the wider range of hospitality brands available to the REIT and the enlarged debt headroom (which would increase options for funding DPU accretive acquisitions).

We would recommend voting in support of the merger at ART’s EGM, which is likely to be held in Oct. After adjustments and with the assumption of a successful merger, we increase our fair value from S$1.25 to S$1.31. Maintain HOLD.

Source: OCBC Research - 4 Jul 2019