Adding Ascendas Hospitality Trust’s Assets; FY20 DPU Up 2.0%

• We revised ASCOTT RESIDENCE TRUST (SGX:A68U)’s DPUs with the completion of its merger with ASCENDAS HOSPITALITY TRUST (SGX:Q1P), which sees the latter’s units delisted on 3 Jan 2020. We estimate a 2.0% FY20 DPU rise against a 34% and 35% increase in revenue and NPI from the scheme arrangement (5% cash, 95% in ASCOTT RESIDENCE TRUST units at SGD1.30). ASCOTT RESIDENCE TRUST’s AUM grows 33% but its SG footprint has fallen on recent divestments, while Australian revenue and NPI jump to 13-21%.
• Recent macros reinforce our view of a stronger SG RevRAR recovery in 2020 and we prefer CDL HOSPITALITY TRUSTS (SGX:J85) (BUY, Target Price SGD1.80) and FAR EAST HOSPITALITY TRUST (SGX:Q5T) (BUY, Target Price SGD0.80).
• Our DDM-based Target Price rises 4% to SGD1.40 (COE 7.2%, LTG 2.0%). Reiterate HOLD.

SG’s Contribution Has Fallen, Amidst Strong Tailwinds

• ASCOTT RESIDENCE TRUST’s SG contribution has declined to 8% and 10% of total revenue and NPI with recent divestments, even as hospitality sector fundamentals are set to improve further, buoyed by a recovery in tourism numbers in 2H19 which have pushed hotel occupancies to 5-year highs.
• We see growth momentum into 2020 from a stronger corporate event calendar, while a tapering supply outlook could lift room rates to strengthen RevPARs. ASCOTT RESIDENCE TRUST will divest its Somerset Clarke Quay which could lower our FY20-21 DPUs by 2% with the completion of the exercise in in 1Q20.

Stable Income Up, Low AU RevPAU Visibility

• Its NPI profile should tilt towards stable income but its Australian contribution rises from 7% to 21% of revenue and from 8% to 13% of NPI, with the addition of ASCENDAS HOSPITALITY TRUST’s portfolio (six hotels valued at SGD612.2m). We remain cautious on the market’s near-term RevPAR outlook, largely due to high new supply.
• We see possible synergies with its hospitality brands, but these are likely in the medium term, with a high concentration of master lease structures (in Japan, S. Korea and SG).

Index Inclusion a Likely Event in 1Q20

• ASCOTT RESIDENCE TRUST’s higher 82% developed market EBITDA contribution from the combined portfolio (up from 75%) and increased SGD2.4b free-float (from SGD1.6b) is above the SGD1.7b index threshold, and should place it well for an inclusion in the FTSE EPRA NAREIT Developed Index in the upcoming Mar 2020 review.
• Valuations now at 5.3% div yield and 4% DPU growth trails peers against a sector recovery.

Source: Maybank Kim Eng Research - 19 Dec 2019