• ASCOTT RESIDENCE TRUST (SGX:A68U) has entered into a put-and-call option to partially divest 15,170 sqm of Somerset Liang Court’s GFA. Using the net divestment proceeds (S$163.3m), Ascott Residence Trust will redevelop the retained GFA of 13,034sqm into a new Somerset serviced residence with hotel license, and refreshed tenure of 99 years (from 57 years).
• The transaction is expected to unlock S$84.3m in gains (comprising S$41.5m in net divestment gain, and S$42.8m in fair value gain from retained GFA).
• Maintain BUY with an unchanged target of S$1.66.

What’s New

Signed a put-and-call option

• Ascott Residence Trust signed a put-and-call option for sale of trustee share in the land attributable to a 15,169.68 sqm GFA for Somerset Liang Court Singapore for S$163.3m. Using the net proceeds, Ascott Residence Trust will redevelop the retained GFA of 13,034 sqm into a new Somerset serviced residence with a hotel license and refreshed 99-year lease (from 57 years). See Ascott Residence Trust Announcements; Ascott Residence Trust Latest News.
• The estimated project development expenditure is S$300m (comprising S$140.3m land value, and S$157.3 total redevelopment cost), or S$2,100psf GFA.

Stock Impact

Unlocking S$84.3m in gains from divestment

• Unlocking S$84.3m in gains from divestment, which comprises of S$41.5m in net divestment gain and S$42.8m in fair value gain from its retained GFA. The divestment price of S$163.3m is 44% above its book value (and 138% above its acquisition price).

Rejuvenation of ageing property ( > 35 years in operation)

• Management noted that the product is ageing, and faces competition from newer hotels. The property has enjoyed capital appreciation, and a healthy occupancy of 90%.

Slated to open in 1H22

• Slated to open in 1H22, the new property will offer 192 units, with more efficient layout and room sizes. Over 50% of the units are 1-2 bedroom units, catering to expatriates, and business executives on long stays.
• With a hotel license, the Somerset property will also have the flexibility to cater to travellers on short stays (vs minimum of 6 nights, under serviced-residence license).

Within the 10% MAS Development limit

• Together with the 324-unit lyf one-north Singapore (a co-living property slated to opened in 2021), management noted that Ascott Residence Trust’s development works only accounts for around 5% of its total deposited property (ie still below the 10% development limit set by MAS).

Minimal impact on gearing

• The redevelopment of Somerset serviced residence will be mainly funded by net divestment proceeds. As such, there is minimal impact on Ascott Residence Trust’s gearing.
• As at 30 Sep 19, Ascott Residence Trust’s gearing stood at 33% with a S$1.1b debt headroom (before reaching the 45% limit).

Pro-Forma financial impact

• Management expects the pro-forma FY18 DPU to decline by 4.6% (due to the absence of contributions from Somerset Liang Court), and NAV to increase by 1.6%.

Earnings Revision / Risk

• We maintain our existing earnings forecast.

Valuation / Recommendation

• Maintain BUY. Our target price of S$1.66 is based on DDM (required rate of return: 6.25%, terminal growth: 1.8%).

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 - 22 Nov 2019