Maiden entry into the US
DPS:
TP:
Nicholas Teh / Research Analyst / 65 6212 3026 /
[email protected] Daniel Lim / Research Analyst / 65 6212 3011 /
[email protected]
● ART announced its maiden entry into the US with the acquisition of a 411-room hotel in New York for ~S$221 mn. This comes shortly after ART’s issuance of S$250 mn perpetual securities and the planned acquisition of seven properties in JP and AU (note here). ● The acquisition will be funded by a combination of the S$100 mn balance from the perpetuity issuance and USD debt (expected to be ~70% fixed at a ~3% cost), implying a blended cost of ~3.8%. The acquisition is expected to be accretive given the hotel’s FY14 EBITDA yield of 6.2%. ● The hotel is located close to Times Square and has achieved occupancy of over 90% in the past three years. The asset will continue to operate under the Element brand of Starwood (agreement signed for 20 years). ● We adjust our 2015-17E DPU by 0.2-3.3% and raise our TP to S$1.37. ART trades at a 2015E yield of 6.1%, the lowest among the hospitality REITs under our coverage. As such, we believe ART's stability has been priced in. Maintain NEUTRAL.
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Post the completion of this acquisition, ART’s gearing is expected to rise from 39.5% to 40.1%, leaving little debt headroom for further acquisitions. However, management has indicated that it is looking to divest older, lower-yielding assets that could help fund additional acquisitions. ART is targeting to grow its asset base to S$6.0 bn by 2017 from S$4.6 bn (post acquisition) currently. As such, depending on the size of any future divestments, ART may have to utilise some equity funding for some potential acquisitions.
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We raise our 2015-17E DPU by 0.2-3.3% (note: the full S$250 mn of perpetual securities recently issued have already been previously accounted for) and subsequently raise our target price from S$1.36 to S$1.37. We maintain our NEUTRAL rating on ART. The REIT trades at a 2015 yield of 6.1% (vs. CDL HT at 6.8% and OUE HT at 7.6%), the lowest among the hospitality REITs under our coverage. As such, we believe the stability from its long-stay business model and high proportion of fixed rents has been priced in. Figure 2: Hospitality REIT comps Px Rec* TP Mkt cap Yield ROE P/B 6M ADT Ticker REIT (S$) (S$) (S$mn) 15E 16E 17E (%) (x) (S$mn) ART SP ART 1.30 N 1.37 2,002 6.1 6.3 6.3 4.5 0.95 1.6 CDREIT SP CDLHT 1.61 N 1.83 1,584 6.8 7.0 7.0 6.5 1.00 2.2 FEHT SP FEHT 0.79 NR 1,398 6.4 6.5 6.5 4.8 0.81 0.6 OUEHT SP OUEHT 0.94 O 1.10 1,243 7.6 7.6 7.6 6.8 1.05 1.3 FHT SP FHT 0.84 NR 1,007 7.3 7.4 n.a. 5.8 1.02 0.4 ASCHT SP ASCHT 0.71 NR 792 8.5 8.6 n.a. 4.0 0.95 1.0 *N = Neutral, O = Outperform, NR = not rated. Source: Company data, Credit Suisse estimates
The acquisition will be funded by the remaining ~S$100 mn balance from its S$250 mn perpetual securities recently issued (4.68% coupon) together with USD debt (average cost of debt is expected to be 3% with 70-80% fixed), giving a blended cost of ~3.8%. As such, given the pro forma EBITDA yield was 6.2%, the acquisition is expected to be accretive. Given the expected strength in the USD, management will leave US income unhedged for now.
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ART announced it will acquire a 411-room hotel in New York for S$220.7 mn (expected to complete by mid Aug-15), marking its maiden foray into the US. Upon completion, the US will account for 5% of ART’s total assets. Management indicated the US is a market it has been considering for the past two years and that we could see US exposure grow further (comfortable with 15-20% US exposure).
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Note 1: ART is a hospitality REIT with service residences across Asia Pacific and Europe.
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Click here for detailed financials
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Figure 1: Geographical asset breakdown (total assets grow from S$4.4 bn to S$4.6 bn)
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The hotel is located in Times Square West and is within close proximity to several iconic locations including Times Square, Broadway and the Rockefeller Center. This has likely supported the asset in achieving high occupancy of over 90% over the past three years, and the dynamics are likely to remain favourable. Since the hotel’s inception in 2010, the hotel has operated under the Element brand of Starwood. Given the Ascott umbrella is still unestablished in the US, ART and Element will continue to operate the hotel for the next 20 years under a management contract arrangement.
Bbg/RIC ART SP / ASRT.SI Price (02 Jul 15 , S$) 1.30 Rating (prev. rating) N (N) TP (prev. TP S$) 1.37 (1.36) Shares outstanding (mn) 1,540.36 Est. pot. % chg. to TP 5 Daily trad vol - 6m avg (mn) 1.4 52-wk range (S$) 1.32 - 1.20 Daily trad val - 6m avg (US$ mn) 1.3 Mkt cap (S$/US$ mn) 2,002.5/ 1,481.0 Free float (%) 45.0 Performance 1M 3M 12M Major shareholders CapitaLand (45%) Absolute (%) 2.8 3.6 8.1 Relative (%) 3.2 7.2 6.1 Year 12/13A 12/14A 12/15E 12/16E 12/17E Net property income (S$ mn) 161.2 180.3 212.2 232.1 240.7 EBITDA (S$ mn) 148.2 160.3 180.9 204.6 211.4 Net profit (S$ mn) 62.7 74.3 94.8 108.6 108.4 Distributable income (S$ mn) 114.8 126.9 134.8 147.0 148.5 EPS (S$) 0.05 0.05 0.06 0.07 0.07 - Consensus EPS (S$) n.a. n.a. 0.07 0.07 0.08 EPS growth (%) (23.2) 5.8 26.8 13.5 (0.9) P/E (x) 28.4 26.8 21.1 18.6 18.8 DPU (S$) 0.08 0.08 0.08 0.08 0.08 - Change from prev. DPU (%) n.a. n.a. 0.2 3.1 3.3 DPU yield (%) 6.5 6.3 6.1 6.3 6.3 P/B (x) 0.9 0.9 0.9 0.9 0.9 ROE (%) 3.4 3.5 4.4 5.0 4.9 Debt/Asset (%) 33.4 37.6 38.8 38.6 42.6
