Ascott Residence Trust

OCBC on 10 Jul 2012

Ascott Residence Trust (ART) announced yesterday four inter-conditional transactions. First, it seeks to divest Somerset Grand Cairnhill Singapore to CapitaLand subsidiaries at S$359m, which would give ART a gross divestment gain of S$87.1m. Second, ART will have a put and call option on a new Cairnhill serviced residence (SR) with a hotel license. The acquisition price is S$405m. This new Cairnhill SR will be built together with high-end residential units for sale by CapitaLand as part of the redevelopment of Somerset Grand Cairnhill. Finally, ART will purchase Ascott Raffles Place Singapore and Ascott Guangzhou for a total of S$283.2m. Excluding the new Cairnhill SR, which is expected to be delivered only in 2017, the transactions are mildly yield accretive. We maintain BUY and raise our fair value estimate, based on RNAV, to S$1.23 from S$1.14 previously, as we roll into our valuation model stronger capital values assumptions and divestment gains from Cairnhill.

Redevelopment of Somerset Grand Cairnhill
ART announced four inter-conditional transactions yesterday. First, ART seeks to divest Somerset Grand Cairnhill Singapore to CapitaLand subsidiaries at S$359m, which would give ART a gross divestment gain of S$87.1m (32.0% over last valuation). Second, ART will have a put and call option on a new Cairnhill serviced residence (SR) with a hotel license and fresh leasehold of 99 years. The acquisition price is S$405m. This new Cairnhill SR will be built together with high-end residential units for sale by CapitaLand as part of the redevelopment of Somerset Grand Cairnhill. The SR will be under a master lease structure with an annual fixed lease rental of S$13.2m and variable lease rental at 85% of net operating income (NOI). ART is not allowed to undertake the redevelopment due to restrictions under the CIS Code.

Acquisition of two Ascotts
Thirdly and fourthly, ART will purchase Ascott Raffles Place Singapore and Ascott Guangzhou for purchase considerations of S$220m and S$63.3m respectively, which are to be funded by the net proceeds from the Cairnhill divestment. Ascott Raffles Place, a 999 year leasehold property in the CBD, has a master lease structure at an annual fixed lease rental of S$7.2m and a variable fixed lease rental at 85% of NOI. Ascott Guangzhou, located in a financial district and with a pre-existing serviced residence management agreement, would mark ART’s maiden entry into that first-tier Chinese city. Excluding the new Cairnhill SR, which is expected to be delivered only in 2017, the other transactions are mildly yield accretive (+0.2% to 8.55 S-cents/share, based on FY11). ART does not intend to raise equity to fund the transactions.

Raise fair value and maintain BUY
We maintain BUY and raise our fair value estimate, based on RNAV, to S$1.23 from S$1.14 previously, as we roll into our valuation model stronger capital values assumptions and divestment gains from Cairnhill.