Proposed acquisition of nine sponsor assets
- ART proposed the acquisition of nine sponsor assets for S$318.3m across five countries
- Deal is expected to be accretive at 2.8% (FY21 pro forma) and will be funded by 54:46 debt to equity
- Acquisition EBITDA yield in the range of 3.7% – 9.7% and the acquisition will bring ART a step closer to medium term target exposure within long-stay lodging segment
- This marks the first major acquisition announcement by ART this year, post c.S$850m of deals executed last year; Commendable accretion amidst compression cap rates and a hawkish interest rate environment
- We currently have a BUY call with TP of S$1.40; Estimates under review
What’s New
- Ascott Residence Trust announced this morning their proposal to acquire nine sponsor assets within the serviced residences, rental housing and student accommodation space.
- The deal is estimated to cost S$318.3m and add an additional 1,018 rooms to bring ART’s asset base to over 18k operating units.
- The acquisition will also deepen their footprint in 5 countries that ART has current presence in.
- Post-acquisition, ART’s gross profit attributable to stable income sources will increase from 69% to 71%, with the acquisition to add income resilience with c.92% of their gross profits from stable income sources.
- Yield accretion of the deal is expected to be 2.8% on a FY21 pro forma basis.
- The deal will be financed by debt and equity on the ratio of 54 : 46, and aggregate leverage will land at 38.5% post deal completion.
- Targeted completion of proposed acquisition will be in Nov’22.
Summary of Acquisition assets
| Property | Location | Number of units | Lodging Type / Contract Type | EBITDA yield (FY21) | Est. total capitalised cost | Appraised Value | Additional details |
| Le Clef Tour Eiffel | Paris, France | 112 | Serviced Residence Master Lease | 3.7% | S$151.3m | S$150.4m | Fixed rent master lease with variable rents and annual indexationScheduled for AEI (master lessee funded) to end by 2024, assets remains operational in the interim |
| 5 Japan Rental Housing | Osaka, Nagoya, Hyogo, Kyoto – Japan | 427 | Rental HousingManagement Contract | 4.1% – 5.0% | S$79.0m | S$80.7m | Average length of stay at 2 years, predominantly local corporate long-stay guests |
| Standard at Columbia (additional 45% stake) | South Carolina, US | 247 rooms, 679 beds | Student Accommodation (Development project)Management Contract | 5.0% | S$34.8m | S$41.4m | Existing development project, Stakes to increase from the current 45% to 90%.Expected completion in 2Q23 |
| Quest Cannon Hill | Brisbane, Australia | 100 | Serviced ResidenceMaster Lease | 6.5% | S$29.7m | S$28.7m | Master lease with rent escalation and reviewOperated by Quest Apartment hotels and situated in emerging suburb of Cannon Hill |
| Somerset Central TD Hai Phong City | Hai Phong, Vietnam | 132 | Serviced Residence, Management Contract | 3.2% (9.7% on 2019 levels) | S$23.5m | S$24.1m | Third largest city in VietnamLocated within a catchment of amenities and close proximity to 3 industrial parks |
Source: Company, DBS Bank
Our thoughts
Delivering on acquisition amidst tightening spreads.
This marks the first major acquisition announced by ART this year following S$850m worth of deals executed in FY21. We believe that the delivery of 2.8% accretion is commendable taking into account the narrowing yield spreads that we have seen across the entire lodging assets space as well as funding structure of approximately half equity. Over the past year, institutional interest for longer-stay lodging assets has narrowed significantly in the span of 50-100bps, landing asset yields between 3.75% to 4.50% in the short span of a year. ART has benefited from their first mover advantage into this longer-stay lodging segment with potentially higher and more acquisition hurdles this year as opposed to the past year, alongside higher funding cost. The decision to bring in equity fund raising instead of further stretching leverage come to us as potentially further acquisitions lined up for this year, which we think will be structured in a similar way. We see ART’s placement as potentially one of the few to take place this year within the hospitality space and timed amidst the recovery cycle.
Closing in on target longer-stay asset target exposure. The 9 acquired assets parks distinctly under either ART’s growth strategy or income resilience strategy. Le Clef Tour Eiffel, Quest Cannon Hill, and the longer-stay assets will continue to deliver stable income with underlying asset performance strong at above 80% occupancy levels, and long lease periods in the range of 1 – 2 years for the longer-stay properties. Somerset Central TG Hai Phong City will deliver multi-year growth to return to pre-COVID EBITDA yields of close to double digit levels from 3.2% from last year’s low, and potentially surpass on the RevPAR metrics as what we have witnessed for other markets that are ahead in the relaxation curve. Post-acquisition, exposure will increase from the current 17% to 19%, a step closer to ART’s medium term target exposure of 25% – 30% exposure within the longer-stay lodging segment.
We maintain our BUY call, TP S$1.40 and estimates for now pending completion
