Friday, May 3, 2013

Ascott Residence Trust (ART) - Corporate Action

I received a circular from Ascott Residence Trust (ART) this morning regarding a corporate action required from Ascott shareholders.
Ascott Residence Trust (ART) proposes to seek the approval of Unitholders for the Target Acquisitions of 3 Service Residence based in China and 11 Residential properties based in Japan.

  • Citadines Biyun Shanghai, Shanghai.
  • Somerset Heping Shenyang, Shenyang.
  • Citadines Xinghai Suzhou, Suzhou.
  • Actus Hakata V-Tower
  • Big Palace Kita
  • Grand Mire Miyamachi
  • Grand Mire Shintera
  • Gravis Court Kakomachi
  • Gravis Court Kokutaiji
  • Gravis Court Nishiharaekimae
  • Grand E'terna Saga
  • Grand E'terna Saga Idaidori
  • Grand E'terna Nijojomae
  • Grand E'terna Chioninmae
Costs of funding the Target Acquisitions

The aggregate costs for the target acquisitions are expected to be equivalent to S$166.8 Million. The company will fund almost 90% (i.e S$147.8 Million) of the costs through the net proceeds raised from a private placement earlier in Feb 2013. The rest of the 10% (S$19 Million) will be funded through debt financing. This increases Ascott net gearing from 40.1% to 41.2% upon successful completion of the acquisitions.

Increased Dividends Per Unit (DPU) for Shareholders

The acquisitions are expected to increase distributable income by S$14 Million for FY2012. Dividends Per Unit (DPU) is expected to increase by 2.9% from 8.76 cents to 9.01 cents. At last closing price on Friday of S$1.405, this translates into a dividend yield of 6.4%.

Valuations of Target Acquisitions

Ascott has engaged Independent Valuers, Colliers and HVS to assess the open market values of the Target properties. The "Income Approach" - using the expected future income cash flow is used to value the assets. To arrive at the appraised values for the properties, both valuers adopted a 10 year cash-flow and applied a terminal cap rate. The projected cash flow are then discounted based on a DCF discount rate.

  • Citadines Biyun Shanghai - Valuation using the above metric stands at RMB 325,000 (~S$63.5 Million). The target purchase costs from Ascott is S$53.8 Million.

  • Somerset Heping Shenyang - Valuation using the above metric stands at RMB 444,000 (~S$86.5 Million). The target purchase costs from Ascott is S$59.4 Million.

  • Citadines Xinghai Suzhou - Valuation using the above metric stands at RMB 122,000 (~S$23.5 Million). The target purchase costs from Ascott is S$14.7 Million.

Independent Advisor - PWC

After considering all factors, PWC has advised the Independent Directors to recommend that Unitholders vote in favor of the Transactions to be proposed at the EGM.

My Thoughts

I thought this is a good acquisition opportunity for Ascott to expand its geographical expansion in China and Japan. Its China portfolio will increase from 9.8% to 14.7% while Japan portfolio will increase from 12.2% to 14.9% after the acquisitions. More importantly, it will tap into the emerging market of Shenyang and Suzhou respectively, something that they have not done in the past.
The acquisitions will also be yield accretive, giving an DPU increase to shareholders of 2.9% from 8.76 cents to 9.01 cents.
 If there is one thing that I am worried, it is that their net gearing is pretty high. The private placement done in Feb 13 has helped to strengthen their balance sheet by reducing their gearing from 40.1% to 36%, much to my relief. Now with the acquisitions, their gearing is back to a higher level at 41.2%. It looks like the placement is an intended move to fund the acquisitions project and not used to repay its borrowings. The amount of short-term repayable debt is huge and with a dividend payout of almost 100% to its shareholders, it looks like another private placement or rights issue may be on the cards once again within the next 1 year. If not for the potential rights issue, I may pick this stock up anytime below S$1.40.
The acquisition news does not seem to come too well for Ascott shareholders. Ascott share price has dropped from S$1.45 prior to the news to S$1.405 after the announcement.

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