Stand down on Ascott REIT in wake of rights issue and acquisitions

SINGAPORE (March 8): UOB Kay Hian has downgraded its call on Ascott Residence Trust (Ascott REIT) to “hold” from “buy” previously, following Tuesday’s announcement of its S$442.7 million rights issue to acquire Ascott Orchard Singapore, Citadines City Centre Frankfurt and Citadines Michel Hamburg.

This translates to 91.9 Singapore cents per share, which is at a discount of 21.5% to the REIT’s closing price of S$1.17 as at Mar 6, and a discount of 17.5% to the theoretical ex rights price.

An extraordinary general meeting (EGM) will be held to seek approval for the two German acquisitions.

In a Wednesday report, analysts Vikrant Pandey and Derek Chang say they have also reduced their target price on the REIT by 10 Singapore cents to S$1.20, after factoring the rights issue and contributions from its acquisitions in Singapore and Germany to represent a 10.2% dilution in distribution per unit (DPU).

The move will reduce the trust’s gearing from 29.8% to 27%, however, to increase debt headroom from S$442.6 million to S$754.4 million.

Post the transaction, the trust’s Singapore exposure will grow from 12-19% as a proportion of its asset base, while exposure to Germany will increase from 2.6% to 4.4%, which Chang and Pandey highlight will bring its asset size to S$5.3 billion, which is close to the S$6 billion target the trust’s management had set for 2017.

The analysts note that aside from being open to further issuance of perpetual securities given the increased headroom, the REIT’s management is considering capital recycling through the potential divestments in non-core assets, such as in Japan and China.

“To support potential acquisitions, management had previously highlighted the likelihood of footprint expansion in the US. In Europe, we note that the sponsor Ascott Ltd has been acquiring assets in Germany and Paris, which we reckon could require 6-9 months to see performance stabilise before potential injection of these assets into Ascott REIT,” they add.

A better-than-expected increase in revenue per average unit (RevPAU) from asset enhancement initiatives (AEIs), as well as yield-accretive acquisitions, would serve as catalysts to re-rate.

As at 4.44pm, units of Ascott REIT are trading 1 Singapore cent lower at S$1.12. — theedgemarkets.com.sg

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