Singapore Recovery Intact, Prefer CDLHT, FEHT

• We slightly lowered NPI/DPU estimates after 1Q19 results but retain Target Price and HOLD rating.
• ASCOTT RESIDENCE TRUST (SGX:A68U)'s 1Q19 DPU rose 7.4% y-o-y (-32.6% q-o-q) with better performance across its properties in Singapore, Philippines and the UK. Gross profit was driven by a 12.1% y-o-y rise in its management contracts, and stronger RevPAUs in Singapore and the UK.
• We have factored in its recent deals and our DDM-based Target Price stays at SGD1.25 (COE 7.6%, LTG 2.0%).
• Ascott Residence Trust’s Singapore concentration is falling, its returns-and-risk profile is influenced by global macros, and a 2% DPU CAGR lags its peers.
• We prefer CDL HOSPITALITY TRUSTS (SGX:J85) (Rating: BUY; Target Price; SGD1.80; see report: CDL Hospitality Trusts - Maybank Kim Eng 2019-05-02: Recovery Slower, But Intact) and FAR EAST HOSPITALITY TRUST (SGX:Q5T) (FEHT SP, SGD0.66, Rating: BUY; Target Price: SGD0.80; see report: Far East Hospitality Trust - Maybank Kim Eng 2019-04-25: Slow Start; Recovery Underway) as they are better leveraged to a Singapore RevPAR rebound than Ascott Residence Trust.

Ascott Residence Trust's 1Q19 in Line With MKE and Street

• Ascott Residence Trust's 1Q19 revenue increased 2.8% y-o-y while gross profit (excluding FRS 116 adjustments) rose by 1.7% y-o-y. Portfolio RevPAR rose 3.1% y-o-y to SGD133 as double-digit improvements in Singapore and the UK helped offset the weaker performance in the US (-4.8% y-o-y) and Vietnam (-1.4% y-o-y).
• Gross profit from its ‘stable’ income rose 1.7% y-o-y, as its French master leases were renewed at lower rents, while there were 17.8-20.0% y-o-y jumps in Singapore and the UK.
• Gross profit from its ‘growth’ income rose 12.1% y-o-y on stronger demand in Singapore, Japan and Philippines.

Strong Quarter for Singapore, Contribution Set to Fall

• Ascott Residence Trust's Singapore revenue and gross profit increased 23.1% y-o-y and 35.0% y-o-y on stronger RevPAU, which jumped 21.8%. But its Singapore AUM is set to fall (from 20.8% to 15.4% of total AUM) with its proposed Ascott Raffles Place divestment, while its maiden co-living development property at one-north does not open until 2021.
• We remain positive on the market’s growth fundamentals against rising demand and tapering 2018-2022 supply, but Ascott Residence Trust’s exposure remains low relative to other hospitality REITs.

A Stronger Balance Sheet After Capital Recycling

• Ascott Residence Trust's balance sheet should be strengthened by its recent deals in Singapore and Australia. Both its SGD353.3m divestment of Ascott Raffles Place at 2.0% exit yield and the AUD60.6m (SGD58.8m) acquisition of Citadines Connect Sydney Airport at > 6.0% EBITDA yield are set to be completed in May 2019.
• Investors are likely awaiting corporate activity, ie, a possible merger with ASCENDAS HOSPITALITY TRUST (SGX:Q1P).

Source: Maybank Kim Eng Research - 2 May 2019