The $969.6m purchase will boost assets by 1.8 times; analysts surprised by size of transaction
ASCOTT Residence Trust (ART) is buying 28 properties from its sponsor, The Ascott Limited, for $969.6 million, and selling one to the latter for $214 million.

With the purchase, ART’s asset size will grow 1.8 times and its reach will stretch past Asia to Europe. But it will be borrowing more and issuing new units – possibly more than half the existing number in issue – to raise over $560 million for the deal.

The sales proceeds will help Ascott, CapitaLand’s service residence arm, in further expansion. The divestment will bring it a net gain of about $52.1 million.

Analysts had mixed reactions to the announcements yesterday morning, made after CapitaLand and ART asked to halt trading in their counters. Many expected ART to buy assets from Ascott, but not so much at a go. ‘What came as a surprise to us was the size and scale of the transaction,’ said OCBC Investment Research analyst Meenal Kumar.

Several also felt that the acquisition, while good for raising ART’s profile, had little impact on its portfolio yield. The purchase is ‘marginally accretive’ but the equity fund-raising will raise ART’s market capitalisation and put it on the radar of more institutional investors, said CIMB analyst Janice Ding.

According to ART, the assets it is buying have an annualised earnings before interest, taxes, depreciation and amortisation yield of 5.7 per cent, exceeding its existing portfolio’s 5.5 per cent.

For CapitaLand, the sale of the assets could be ‘motivated more by desire to grow ART than maximising profit’, according to Standard Chartered’s Regina Lim and Wong Yan Ling in a note.

With the acquisition, ART’s portfolio will grow to $2.85 billion from $1.59 billion, with properties in 23 cities across 12 countries. The trust will gain exposure to Europe – the region will account for some 45 per cent of its total asset value, up from zero.

Of the 28 service residence properties it is buying, 26 are in Europe, across France, the UK, Germany, Belgium and Spain. Just two are in Asia – Somerset Hoa Binh in Vietnam and Citadines Singapore Mount Sophia. Ascott will continue to manage all these assets.

The performance of service residences in key European cities has been stable, said Chong Kee Hiong, CEO of ART’s manager, at a briefing. He noted that occupancy rates reached 95-97 per cent in the last few years even during the financial crisis.

It has been challenging finding a large chain of properties to buy and future purchases are likely to be piecemeal, he added.

ART will hold an extraordinary general meeting on Sept 9 to seek shareholders’ approval for the acquisition, divestment and issue of new units.

The equity fund-raising – comprising a non-renounceable preferential offering to existing unitholders and a private placement – should be completed by year-end. Ascott will subscribe for new units to maintain its 47.7 per cent stake in ART.

Details have not been firmed up but ART suggested that it might raise $560.6 million from placing out 487.5 million new units at an illustrative price of $1.15 apiece. As at Monday, 619.6 million units of ART were in issue.

The illustrative issue price is 4.2 per cent below ART’s closing price of $1.20 yesterday. The counter lost six cents after trading resumed in the afternoon.

ART will also take on more debt, estimated at $116.3 million. On the whole, it does not expect its gearing of 40.7 per cent as at June 30 to rise.

ART’s sale of Ascott Beijing in China to Ascott will provide another source of funds. Home prices in Beijing have been rising and the 310-unit property at Chaoyang would be worth more in a strata-title sale but such a repositioning is not part of ART’s core business, Mr Chong said.

Ascott will realise the best value for Ascott Beijing even if it means converting the property to another use, said the group’s CEO Lim Ming Yan. It is evaluating options, but is likely to refurbish the building before selling it.

The divestment of assets to ART is in line with Ascott’s strategy to recycle capital for investment. Ascott will receive net cash proceeds of some $332 million after the sale, the purchase of Ascott Beijing, and the new unit subscription. It will have a capacity of over $700 million to fund growth, Mr Lim said.

Ascott said early this month that it aims to grow the number of service residence apartments in its portfolio to 40,000 by 2015, up from some 26,000 now.

It no longer owns assets in Europe with the sale to ART but it still holds the title to around 5,200 units in Asia Pacific. These units, together with new ones it buys, will form ART’s acquisition pipeline.

CapitaLand closed unchanged at $4.05 yesterday.

Source: Business Times, 21 Aug 2010

Group to expand its portfolio by over 50% in next five yrs

CAPITALAND’S service residence arm, The Ascott Limited, is expanding its portfolio by more than 50 per cent in the next five years.

The division hopes to contribute more significantly to CapitaLand as it grows – perhaps accounting for as much as 20 per cent of group earnings in future.

Ascott chief executive Lim Ming Yan shared these plans for ‘transformational change’ with the media, in conjunction with the launch of the group’s project – Ascott Huai Hai Road Shanghai. The 278-unit property near the Xintiandi entertainment district is owned by Hong Kong-listed real estate group Lai Fung Holdings.

Ascott now has some 26,000 service residence apartments in its portfolio and it aims to raise this number to 40,000 by 2015.

The target is achievable looking at Ascott’s rate of growth, Mr Lim said. This year, the firm will be rolling out about 3,100 apartments. Of these, some 1,600 units across seven properties will be ready in the second half, in countries such as China and Indonesia.

Much of the envisioned growth will come from China. Ascott has just won contracts to manage four Ascott-branded properties in Ningbo, Hangzhou, Suzhou and Guangzhou. The biggest among these will be Ascott Guangzhou IFC, with 314 units, due to open next year.

South-east Asia is likely to be the next fastest growing market for Ascott. For instance, Mr Lim is positive about Singapore’s service apartment sector as the country develops as a regional business centre.

Occupancy rates for Ascott’s properties in Singapore exceed 90 per cent, and ‘we are constantly on the lookout for new opportunities’, he said.

India and Europe are also on Ascott’s radar. It could enter Italy, Switzerland, Turkey and the east European countries.

While merely taking on more management contracts is a fast way to grow, Ascott will continue to focus more on buying and running properties.

It owns and manages about 67 per cent of its portfolio, and is prepared to invest in key gateway cities, Mr Lim said.

Ascott could obtain capital for growth from private equity funds, such as the Ascott China Fund. It could also sell assets to Ascott Residence Trust for funds to re-invest.

Mr Lim did not say how much the entire portfolio expansion would cost.

But he disclosed that Ascott will invest $50 million to refurbish more than 10 of its properties in Asia and Europe over the next 12 months. This is on top of around $20 million it has put in to renovate some properties such as Somerset Liang Court.

As Ascott grows, it ‘can and should be a significant part of CapitaLand’, Mr Lim said. On average, it has accounted for some 10 per cent of the group’s earnings in the last few years, but it would be possible and ‘more meaningful’ to raise this to up to 20 per cent, he added.

Source: Business Times, 2 Aug 2010