• 4Q19/FY19 NPI and DPU in line with forecast.
• Diversified portfolio proving resilient, active portfolio reconstitution unlocked c.S$200mn of net gains.
• The longer average length of stays typical for serviced residence, driven by corporate clientele makes ART less affected by Coronovirus impact compared to leisure-driven hospitality REITs.
• Upgrade to BUY with a higher TP of $1.53 due to higher earnings/DPU forecast and factoring in recent divestments and the redevelopment of Somerset Liang Court.

The Positives

• Revenue and gross profit stable, minor fluctuations due to asset recycling deemed normal. ART’s diversified portfolio kept earnings stable, with better performance in certain counties, (Philippines, Belgium, Singapore, Vietnam) offsetting softer markets (Australia, China, Japan) which experienced strong competition. Highly accretive asset recycling caused a minor dip in earnings but overall beneficial to unitholders and normal in the course of business. Figure 1 summarises the notable events in FY19.
• Active portfolio reconstitution unlocked S$200mn in net gains which were reinvested into higher-yielding assets. In 2019 ART divested Ascott Raffles Place, Somerset West Lake Hanoi, partial sale of Somerset Liang Court, Citadines Xinghai Shuzhou and Citadines Zhuakou Wuhan. Ascott RP was divested at an exit yield of 2%, 64.3% above book value, with net gains of c.S$135mn which were partially reinvested into Citadines Connect Sydney Airport (CCSA) (EBITDA yield of c.6%). The sales of the two Citadines assets in China at an exit cap rate of c.3.7%, >30% above book value, will reap net gains of c.S$21.2mn and is expected to be completed in 1H20. The partial sale of the Somerset Liang Court asset and at 4% above book value would yield S$84.3mn revaluation gains, S$49.8mn of which will be realised upon completion of the sale in April 2020, while the remaining S$42.8mn would be tied to the retained land which will be redeveloped as part of the proposed integrated development at Liang Court (stabilised yield of c.4%).
• Cost of borrowing was fell 10bps to 2% p.a. ART refinanced S$150mn 5% of perps with S$150mn 3.88% perps in September 2019, capturing c.S$1.7mn in savings. A second tranche of S$250mn 3.86% perps are callable in June 2020 and we believe ART will once again capitalise on the opportunity to refinance their perps at a lower coupon.

The Negatives

• 4Q19 revenue fell 1.8% YoY due to divestments, but gross profit grew 3%. Divestment of Ascott RP and Somerset Hanoi resulted in lower 4Q19 revenue, partially offset by contribution from CCSA. Though the divestment and acquisition of Ascott RP and CCSA were both timed to occur in May 2019, CCSA’s contribution would only partially offset the loss of income from Ascott RP given that it is a smaller asset. Higher 4Q19 gross profit was supported by better performance in the Philippines (+42%), Belgium (+38%), Singapore (+20%) and Vietnam (+7%).

Outlook

The merger with Ascendas Hospitality Trust was completed 31 December and will contribute to ART’s portfolio from 1 January 2020. Figure 2 and 3 show the breakdown of ART’s gross revenue by geography and lease type with the contribution from AHT’s master leases assets in Japan (5), Korea (2) and Singapore (1) and management contract assets in Australia (6).

Inclusion into the FTSE Nareit Developed Index is likely given that ART has met the criteria for inclusion.

Impact of the Novel Coronavirus

The management expects that travel volumes will be impacted in the short-term, as well as some cancellation of bookings. However, given ART has more long-term stays than short-term stays which are driven by corporate clients on project groups or secondment and less leisure-tourism dependent, we expect to be more protected than other hospitality REITs. Figure 4 shows the average length of stay at their accommodations by country, which ranges 1 to 7 months.

Upgrade to BUY with a higher target price of $1.53 (prev. $1.36).

Our forecast includes the contributions from the AHT portfolio as well the announced divestments of Somerset Hanoi, partial divestment and redevelopment of Somerset Liang Court and the divestment of the 2 Citadines assets in China. The recent collapse in the share price due to the uncertainty caused by the Novel Coronavirus presents a good entry price, in our opinion. We upgrade our recommendation to BUY from ACCUMULATE. ART is trading at an attractive yield of 6.6% and P/NAV of 0.94.