3Q18 DPU up 7.7% y-o-y; SG recovery underway

• Ascott Residence Trust's 3Q18 DPU was in line with consensus and our estimates at 1.82 SGD cts, up 7.7% y-o-y but down 1.1% q-o-q. Growth was driven by 9% y-o-y increases in both its stable and growth income, helped by acquisitions in Singapore and the US.
• We trim DPU by 1% but keep our DDM-based Target Price at SGD1.15 (COE 7.9%, LTG 2.0%).
• Global macros are expected to drive Ascott Residence Trust's returns-and-risk profile and keep its DPU growth at an estimated 2%.
• We prefer CDL Hospitality Trusts (SGX:J85) and Far East Hospitality Trust (SGX:Q5T) as they should be better leveraged to a Singapore RevPAR rebound. HOLD.

Rise in stable and growth income, SG and US deals

• Revenue rose 6.0% y-o-y/ 3.1% q-o-q with contributions from newly-acquired Ascott Orchard in Singapore and DoubleTree by Hilton in New York. Demand was also stronger in the UK and Belgium, where RevPAR rose 7% and 2% y-o-y respectively. This offset two China asset divestments.
• Gross profit from its stable income - master leases and management contracts with minimum rent guarantees - rose 8.9% y-o-y following its Singapore acquisition.
• Growth income from management contracts jumped 9.4% y-o-y and 5.2% q-o-q, with its US transaction completed in 3Q17. Its three US deals so far have skewed contributions towards its growth income, but we believe RevPAR will need time to rise against a surge in US room supply.
• We forecast FY18-20E DPU growth of 1-2%, behind peers’ 4-6%.

SG fundamentals Improving

• Its Singapore revenue, gross profits and RevPAU jumped 19%, 27% and 19% y-o-y. On a same-store basis, we estimate revenue and gross-profit growth of 14% and 16% y-o-y respectively.
• Ascott Residence Trust has acquired a 4,549 sqm site at one-north in Buona Vista for SGD62.4m or SGD850 psfppr to develop its maiden co-living property. This is fully debt-funded at a SGD117.0m development cost, implying a 6% yield-on-cost. The project will include 324 serviced-residence units managed by Ascott as a lyf-branded property. Targeting millennials, it is set to open in 2021. We see firm demand upon completion given 95-98% occupancies at surrounding business parks.

Swing Factors 

Upside 

• Earlier-than-expected pick-up in corporate demand. 
• Better-than-anticipated RevPAUs. 
• Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values. 

Downside 

• Sizeable increases in SR room supply without commensurate growth in demand. 
• Deterioration in global economy, resulting in declines in RevPAUs. 
• Significant FX volatility could impede hedging and affect DPUs. 
• Sharper-than-expected rise in interest rates could increase cost of debt and affect earnings, with higher cost of capital lowering valuations.