Ascott Residence Trust: Defensive master leases (OCBC)

3Q results in line. Ascott Residence Trust (ART) announced a 3Q11 distribution of S$25.3m, up 112% YoY. The distribution per unit amounted to 2.23 S-cents. This came in broadly in line with our expectations as 3Q11 distribution income made up 26.3% of our FY11 forecast. 3Q11 topline of S$72.9m, up 57% YoY, was also in line and constituted 25.7% of our annual estimates. We saw revenue improve YoY mainly due to an additional S$31.7m contribution from 28 properties acquired in Oct 10, partially offset by the divestments of Ascott Beijing and Country Woods. We continue to see YoY expansion in gross margin to 55% in 3Q11 from 45% in 2Q11 on the back of higher margins for master leases and higher rental rates.

Portfolio performance buffered by master leases. The 28 properties on master leases and management contracts with minimum-guaranteed income (out of 64 portfolio properties) contributed 46% of 3Q11 gross profit. We continue to believe that the longer weighted average tenure of these leases (~7 years) will inject stability into earnings and buffer ART against potential macro volatilities in the UK and France where the bulk of exposure is. For properties on management contracts, we continued to see pressure on a YoY same-store basis in China, Indonesia and Vietnam. As a result, 3Q11 revenues on a same-store basis decreased 1.2% YoY to S$41.3m. Group 3Q11 REVPAU increased 11% YoY, however, fueled by improved performances in Singapore and the UK.

S$393m to be refinanced in FY12. As of end 3Q11, ART's gearing was stable at 41.4% with a relatively well spread-out maturity profile. We expect about 35% (S$393.1m) and 11% (S$123.2m) of ART's debt to be rolled over in FY12 and FY13, respectively. The bulk of the group's debt is denominated in Euros (48%) and Japanese Yen (25%) and evenly distributed between floating (54%) and fixed debt (46%), which puts ART in a relatively neutral position in terms of currency and interest rate exposure.

Maintain BUY at revised S$1.13 fair value. We continue to see value in ART given defensive earnings from master leases and management contracts with minimum-guaranteed income. In addition, its portfolio is diversified across geographically which would buffer earnings somewhat against regionspecific weaknesses. We also expect redevelopment details for the Somerset Grand Cairnhill Singapore to be a potential upside catalyst. Given heightened macro uncertainty, however, we lower our REVPAU assumptions for management contracts and update our country-specific discount rates to reflect increased macro-risks. Hence we revise our fair value estimate to S$1.13 from S$1.35 previously but maintain BUY.