• The merger of ASCOTT RESIDENCE TRUST (SGX:A68U) and ASCENDAS HOSPITALITY TRUST (SGX:Q1P) will create Asia Pacific’s largest hospitality trust with assets of S$7.6b.
• The acquisition will enlarge Ascott Residence Trust’s capacity to acquire more quality assets and take on more development/conversion projects. Debt headroom has increased by 25% to S$1b. The deal provides DPU accretion of 2.5%.
• With enhanced liquidity and concentration in developed markets, Ascott Residence Trust is on course for inclusion into the FTSE EPRA NAREIT Developed Index.
• Maintain BUY. Target price: S$1.46.

What’s New

Together as one.

• ASCOTT RESIDENCE TRUST (SGX:A68U) has proposed to acquire all ASCENDAS HOSPITALITY TRUST (SGX:Q1P) stapled units for a total consideration of S$1,235.4m or S$1.0868 per Ascendas Hospitality Trust stapled unit, comprising 5% in cash (S$0.0543 per Ascendas Hospitality Trust stapled unit) and 95% in new Ascott Residence Trust stapled units (Ascendas Hospitality Trust shareholders will get 0.7942 new Ascott Residence Trust stapled units for each Ascendas Hospitality Trust stapled unit).
• The exchange ratio of 0.836x for the share swap is based on the respective NAVs for Ascendas Hospitality Trust (S$1.02 as at Mar 19) and Ascott Residence Trust (S$1.22 as at Dec 18).
• The offer price of S$1.0868 per Ascendas Hospitality Trust stapled unit is based on Ascott Residence Trust's share price of S$1.30.

Stock Impact

Ascott Residence Trust on course to become largest hospitality trust in Asia Pacific with assets of S$7.6b.

• Ascott Residence Trust’s total by 33% to S$7.6b. The enlarged size of Regal REIT, is ranked second 2.5x the size of CDL HOSPITALITY TRUSTS (SGX:J85) (ranked 6th).
• The acquisition adds 14 Asia Pacific (Singapore Korea: 2 Australia: 6 Japan: 5 hotels), creating an 88 with more than 16,000 units in 3915 countries across Asia Pacific, Europe and the US diversify Ascott Residence Trust’s global forays new gateway cities – Brisbane and Seoul.

Enhanced scale, liquidity and concentration in developed markets facilitate inclusion into FTSE EPRA NAREIT Developed Index.

• The combined entity will see its free float increase by 50% to S$2.4b (exceeding index inclusion threshold of S$1.7b), and EBITDA derived from developed markets expand to 82% (previously: 75%), on a pro-forma basis for 2018. This will further enhance trading liquidity, potentially leading to a positive re-rating of its unit price.

Enhanced debt headroom of S$1b, paves way for more organic/inorganic growth.

• With a larger asset base and pro-forma gearing of 36.9%, debt headroom is expected to grow to S$1.0b for the merged entity with a 45% gearing limit (previous: S$0.8b). Debt headroom is much higher at S$1.8b if leverage limit is lifted to 50%, which is currently being considered under MAS’ industry consultation.

DPU accretion of 2.5%.

• Management expects the acquisition to be DPU accretive (boost 2018 pro-forma DPU by 2.5% to 7.34 S cents) and NAV neutral (NAV unchanged at S$1.22).

Enhanced diversification and resilience.

• The merged entity will see its presence in Asia Pacific strengthen by +11% to account for 71% of portfolio valuation (where demand for business and leisure travel is robust). Freehold properties will also expand by +8% to account for 61% of portfolio valuation. No country contributes more than 20% gross profit for pro-forma 2018.
• The merged entity will continue to have a balanced mix of stable and growth income (gross profit breakdown of 54% by Management Contracts, 36% Master Lease, and 10% Management Contracts with Minimum Guaranteed Income).

Earnings Revision / Risk

• We maintain our existing earnings forecasts.

Valuation / Recommendation

• Maintain BUY. Our target price of S$1.46 is based on DDM (required rate of return: 7.0%, terminal growth: 2.0%).

Share Price Catalyst

• Contributions from yield-accretive acquisitions.
• Contribution from lyf one-north, its maiden development project.
• Increased contributions from newly-refurbished properties.

Source: UOB Kay Hian Research - 4 Jul 2019