Ascott Residence Trust - Results above expectations; Maintain BUY (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.205

Fair Value: S$1.35

2Q11 results above expectations. Ascott Residence Trust (ART) announced a 2Q11 distribution of S$26.3m, up 127% YoY. This came in above our expectations as 2Q11 distribution income made up 30% of our FY11 forecast. As a result, we increase our FY11 revenue and distribution income forecasts by 5.0% and 11.3% respectively. 2Q11 revenue improved 65% YoY mainly due to the contributions from 28 properties acquired in Oct10. Gross margin expansion to 56% in 2Q11 further boosted the YoY gross profit growth to 98%, fueled by higher margins on master leases, higher rental rates and better cost management. Revaluation gains of S$82.8m were also recognized.

Steady performance across portfolio. Master leases on 20 properties constituted about 25% of ART's 2Q11 gross profit, boosting performance YoY given the higher margins from these leases. These leases have an average weighted remaining tenure of seven years and are expected to underpin performance going forward. We saw improved YoY performance across countries, except for China, Indonesia and Japan. In China, this was due to the divestment of Ascott Beijing in Oct10 and poorer performance at Tianjin and Shanghai, offset by Beijing. In Indonesia, this was due to the divestment of Country Woods in Oct 10 and the strengthening of the SGD versus USD. The poorer performance in Japan was mainly due to the effects of the earthquake. 2Q11 REVPAR across the portfolio increased 17% YoY to $147, mostly due to Singapore and UK. Occupancy remained stable at 81%.

Healthy balance sheet. ART continued to show a healthy balance sheet with gearing at 40.1% and cash at S$112.7m. 59% of debt have fixed-rate terms, with the remaining 22% and 19% under floating with interest rate caps and floating rates, respectively. 11% or S$119.4m of total outstanding borrowings fall due in 2011, of which S$110.0m has been refinanced in Jul 11. The remaining S$9.4m is expected to be paid down according to scheduled terms.

Maintain BUY. We see further upside to ART's unit price due to continued good execution from management. Its diversified portfolio across geographical regions would also buffer earnings somewhat against region-specific weaknesses. (28.3% Europe ex. UK, 45.1% Asia ex. Japan, 16.6% UK, 10% Japan, by asset values end 2Q11) Moreover, we expect a significant portion of profits (44% of gross profit 2011 YTD) to be underpinned by master leases and guaranteed income management contracts going forward. Maintain BUY with a revised fair value estimate of S$1.35 ($1.30 previously).