Pan-Asian service residence REIT

The Pan-Asian service residence REIT reported 2Q15 results that missed expectations as DPU dipped 4.6% y/y to 2.09¢, due largely to the absence of FX gain. Adjusting for the one-off item in 2Q14, DPU would have risen 5%. This brought its 1H15 DPU performance of 3.85¢ to 45% of full year consensus estimate.

For the quarter, revenue climbed 12% to $98.7m, underpinned by additional contributions from acquisitions made in Australia, China, Japan, and Malaysia in 2014.

However, gross margins fell 2.7pp to 50.1% on lower gross profit contributions from master leases in Europe (due to the weaker euro) as well as lower margins from management contracts in Indonesia, Philippines, and Singapore. Consequently, gross profit grew at a slower 6% to $49.4m.

Overall RevPAU fell 6% to $129/day due to weaker performance from properties in Singapore and Philippines as well as lower average daily rate from China properties. Excluding new acquisitions, the room rates were comparable to 2Q14.

Continuing on its acquisition prowl, ART is adding another five serviced residences in Australia (Citadines Melboune), Japan (Citadines Shinjuku, Citadines Kyoto, portfolio of four Osaka properties) and US (Element NY Times Sq) totalling $466.7m. This will enlarge its portfolio size by 12.2% to $4.6b.

When the acquisition of the refurbished Cairnhill serviced residence in Singapore is completed by 2017, ART’s portfolio would reach $5b, closer to its target of $6b.

Apart from the Cairnhill asset, these acquisitions are expected to increase DPU by 3.8% to 8.51¢. That implies a dividend yield of about 6.4% based on current prices.

Aggregate leverage improved 2.9ppt to 35.8% following the issue of perpetual securities earlier this year. Average debt-to-maturity held steady at 4.3 years with effective borrowing rate flat at 2.9%.

ART is currently trading at 0.96x P/B with an annualised dividend yield of 6.1%. The street has 5 Buy, 6 Hold, and 1 Sell calls on the counter with a TP of $1.34.

Latest broker ratings:
Daiwa maintains Hold with TP of $1.28
CIMB maintains Hold with increased TP of $1.30
OCBC maintains Buy with TP of $1.44 under review