ART’s 2Q09 results are due on 23rd July. We are expecting DPU to decline around by 20-25% yoy on the back of a decline in REVPAU. ART declared a DPU of 1.77 cts for 1Q09, which will be paid in the interim together with the 2Q09 DPU. Our full year DPU estimate of 6.8 cts implies a yield of 8.9%.
Singapore is ART’s third largest market after Vietnam and China. Singapore’s serviced residences (SR) in general still have a high occupancy rate of 75-80% vs 65-70% for hotels. However, competition may intensify as two new SR have opened this year by Fraser Hospitality and Citadines (Ascott Group) and two more by Fraser Hospitality will open in 2011 and 2012 at business parks. Earnings volatility may persist as the short-term stay segment in China remains competitive and positive near term catalysts are limited.
However, despite the recession, the reported occupancy rate of 90% at the Citadines Singapore Mount Sophia is encouraging and shows that demand still exists for SR as cautious business travellers seek options that maximize value.
ART’s gearing of 38.7% is above sector average of 28.5%. Facing a potential decline in asset values and given the recent strength in price performance, a recapitalization exercise is possible despite the punitive DPU dilution, absence of major refinancing needs until 2011 and paying down of low cost debt with higher cost equity is undesirable.
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