Why Ascott Residence Trust will have a "muted" 2013

ART assets grappling with tough markets.

OCBC Investment Research predicts that Ascott Residence Trust, which has disappointed in its 1Q13 performance, will continue to show a "muted" operational performance for the rest of the year across multiple geographical markets such as Singapore where its assets face a mild oversupply situation.

Here's more from OCBC:

Gearing at 41%. The unit price of Ascott Residence Trust (ART) has fallen 13.3% since the high of S$1.50 on 22 May 2013 along with the general market pullback over concerns about an early tapering of the Fed’s QE program. In this context, it is worthwhile highlighting that ART’s gearing has increased from 36% to 41% following the completion of the acquisition of three prime serviced residences in China and a portfolio of 11 rental housing properties in Japan for S$287.4m on 28 June 2013. The new gearing level is high compared to hospitality REIT peers, e.g. 28% for CDLHT and 29% for FEHT, and may be viewed less favorably by investors given an environment of higher interest rates. In our view, any further significant acquisitions would entail some degree of equity funding.

EUR, GBP, CNY appreciation will help SGD-valuation. The EUR, GBP and CNY have risen ~3.7%, ~2.3% and ~3.5% versus the SGD from 31 March 2013 to 30 June 2013. This bodes well for the book valuation of ART’s properties in Europe ex-UK, the UK and China, which account for 22.6%, 14.4% and 14.7% of ART’s total property asset value after the recent acquisitions. However, we also note that the JPY has fallen 2.9% over the same period versus the SGD; Japan accounts for 14.9% of the property portfolio post-acquisition.

Unexciting 2013. To recap, 1Q13 performance for ART missed expectations, reporting a 3% YoY decrease in revenue to S$69.2m. RevPAU fell 10% YoY to S$124 and gross profit fell 9% YoY to S$33.8m. We expect fairly mute operational performance for ART’s assets in multiple geographies for the rest of the year. For example, Singapore (18.2% of property asset value after acquisitions) is facing a mild oversupply situation for hospitality assets. ART's UK serviced residences face a tougher YoY comparable with the absence of the 2012 London Olympics.

Maintain HOLD. Taking into account the increase in the Singapore government 10-year risk-free rates from 1.4% (in early May) to 2.5% recently, we reduce our FV to S$1.31 from S$1.35 and maintain a HOLD rating on ART.