• Ascott Residence Trust's 1Q19 DPU of 1.33 Scts was a slight miss at 22% of our FY19 forecast.
• The management contracts segment improved; the strong balance sheet should support potential acquisition growth opportunities.
• Maintain HOLD with a slightly higher Target Price of S$1.15.

Ascott Residence Trust's 1Q19 Results Highlights

• ASCOTT RESIDENCE TRUST (SGX:A68U)’s 1Q19 DPU of 1.33 Scts was slightly below our expectations at 22% of our FY19 forecast. This was achieved on the back of a 4% increase in revenue and 12% rise in gross profit (+2% excluding FRS116 impact).
• The improvements came from better contributions from Singapore, Philippines, Japan, UK and Belgium. This helped offset the effects of lower master lease income in France in 4Q18.
• There was also a fair value surplus of S$135.9m arising from the sale of Ascott Raffles Place Singapore, expected to completed in May 19.

Improvements in Singapore, Japan, Philippines and Parts of Europe

• Gross profit from master leases was down 1% y-o-y in 1Q19, dragged by lower rent upon renewal of six master leases in France in 4Q18. This was offset by higher management contract income from properties in Singapore, Japan and Philippines. In addition, contributions from management contracts with minimum guaranteed income also improved across UK, Belgium and Spain.
• There was higher corporate and leisure demand in Singapore and UK as well as improved take-up from leisure demand in Melbourne and Japan.

Healthy Gearing of 35.7%

• Gearing stood at 35.7% at end-1Q19. Based on a ceiling of 45%, Ascott Residence Trust has potential headroom of S$900m to tap acquisition growth opportunities. Potential locations include Australia, UK and the US.
• Ascott Residence Trust has recently announced the purchase of Citadines Connect Sydney Airport for A$60.6m or at an expected yield of 6% following the sale of Ascott Raffles Place Singapore for S$353.3m or an exit yield of 2%.
• Balance sheet metrics are robust with 80% of its debt on fixed rates and low refinancing needs in 2019.

Maintain HOLD

• We update our FY19-21 DPU estimates to factor in the impact of the divestment of Ascott Raffles Place, offset by interest savings as well as contributions from the recently-acquired Citadines Connect Sydney Airport.
• We also adjust our DDM-based Target Price to S$1.15 to reflect changes in our cost of equity assumptions. Our HOLD call is retained.
• Upside risks could come from accretive acquisitions and downside risks from weaker-than-expected RevPAU performance from the management contracts segment.

Source: CGS-CIMB Research - 30 Apr 2019