Assuming ART raises S$412m based on a 40% discount to its last trading price, an estimated 981m rights units have to be issued. This will dilute FY10F DPU from 6 cts to 3.3 cts, after interest costs savings. The implied yield of just 4.8% appears unattractive compared against the rising bond yields, though gearing should lower to just 10%, assuming all proceeds are used to pay off debts.
In contrast to its sister REITs, we expect undesirable reactions to a rights issue; Firstly, earnings volatility are greater for hospitality REITs. Hence, earnings risk will exacerbate DPU dilution. Secondly, as 45% of debt outstanding are Yen-denominated, paying down low-cost debt with higher-cost equity does not make economical sense. Lastly, ART does not have major refinancing needs until 2011.
According to the management, China, its 2nd biggest market as of 1Q09, continues to face intense competition. Its Singapore market has benefited from recent marketing activities as reflected in higher occupancies of ~70% (vs 50-60% in 1Q09), but REVPAU is subdued due to lower room rates. Vietnam, its largest market which targets the long stay segment, continues to show stable performance.
We would look beyond the higher than average gearing and are believers in ART’s ability to manage its balance sheet and refinance. Recent announcement shows a director still buying at around the $0.68 level. Our current estimates are relatively conservative and we believe the market has already discounted the earnings decline in FY10F, implying upside from earnings upgrade. Reiterate Buy.
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