Building a defensible portfolio
- ART to acquire nine properties for S$318.3m, subject to unitholder approval.
- Post-acquisition, income from stable sources to increase from 69% to 71%, while extended-stay AUM rises from 17% to 19% pre- vs. post-acquisition.
- Reiterate Add with a higher TP of S$1.25; our FY22-24F DPU raised 1.1- 5.9%.
Acquisition of nine properties from Sponsor for S$318.3m
ART announced the acquisition of three serviced residences (SRs) in Australia, France and Vietnam, five rental housing assets in Japan and an additional 45% stake in South Carolina student accommodation, Standard at Columbia, for a total purchase consideration of S$215.2m on 15 Aug 22, which is the capitalised asset value minus debt. The agreed property value of S$318.3m represents a 2.2% discount from the appraised value and will increase AUM from S$7.7bn as at 31 Dec 21 by 7.8% to S$8.3bn. EBITDA yield for the assets in FY21 ranged from 3.2% to 6.5%. Based on the management’s LTV assumption of 54%, the proposed acquisitions will lift FY21 DPU by 2.8% on a proforma basis. The management estimates legal completion to occur in Nov 22. ART raised S$170m via the private placement of 118.9m units at S$1.12 per unit on 15 Aug 22 to partially fund the acquisition. The management indicated that S$45.3m or 26.6% of the S$170m raised will be earmarked for future potential acquisitions. In lieu of the private placement, ART management estimates advanced distribution for 1 Jul-23 Aug 22 to be 1.002-1.102 Scts, which is expected to be paid on or around 18 Oct 22. The proposed acquisition is subject to shareholder approval at an EGM slated for 9 Sep 22.
Increasing income resilience
About 92% of the acquisition portfolio’s gross income is from stable sources stemming from the extended-stay assets – five Japan rental housing assets and the US student accommodation asset which have average length of stays of two years and one year respectively – and the master-leased SRs in France and Australia. This increases ART’s stable income from 69% to 71% of gross profit and long-stay AUM from 17% to 19% prevs. post-acquisition, bringing it closer to its medium term AUM target allocation of 25-30% for extended-stay assets. The SRs in Australia are on a 10-year master lease commencing 11 Jun 2018, with built-in 3% escalations in years 3, 5 and 7-10 and rent review in year 6 with an option to renew for three further terms of five years each. The 10-year master lease for the French SR will commence upon completion of the acquisition and is subject to annual indexation based on the French Commercial Rent Index. The only asset on management contract, Somerset Central TD Hai Phong City
Vietnam, achieved occupancy of 90% in Jul 22, in line with its pre-pandemic performance. Average daily rate (ADR) recovered to 70% of 2019 levels, implying upside to the FY21 proforma yield of 3.2% vs. its pre-Covid EBITDA yield of 9.7%.
Reiterate Add with a higher DDM-based TP of S$1.25
Our DDM-based target price increases from S$1.24 to S$1.25 after we factor in FY22F24F DPS accretion of 1.1-5.9% from the proposed acquisition. We may see more acquisitions by ART given its pre-emptive EFR, low cost of borrowing of 1.7% and comfortable gearing of c.37.8%. Re-rating catalysts include accretive acquisition and faster recovery from Covid-19. Downside risk include slower-than-forecasted recovery.