CapitaLand and Ascott

It was confession time as Group CEO Liew Mun Leong said the Ascott Group will become a real estate company active in buying, investing in and trading serviced apartment properties, because hospitality operations are a “laborious” way to profits.

It was Ascott’s less-than-satisfying performance that we believed was the real reason why C-Land privatized Ascott in early 2008, offering $1.73 per share, which represented:

- 43% premium over Ascott’s undisturbed priceof $1.21 before the offer announcement.
- 2.37x price-to-book of 73 cents per share.

The numbers were simply not there, despite Ascott being built up to be the world’s largest serviced residence operator outside the US, if exceptional trading profits were excluded.

While now academic, we believe Ascott could well have performed even worse than Ascott Residence Trust (ART) during the current crisis. ART fell from $2.14 in Mar ’07 to 35 cents on Feb 25th this year, despite a generous yield, which Ascott shares did not offer.

Yet we believe investors may well welcome Mr Liew’s “confession”, which we believe, may also mean that it is a matter of time (albeit likely later than sooner) before C-Land privatizes ART as well.

After all, C-Land’s focusing on trading of properties owned by Ascott implies cutting off the source of assets that are intended to be spun off to ART, as was the stated intention at the time of the establishment of ART in early 2006. (Then, Ascott sold 12 initial properties to ART for $662 mln, payable $63 mln by cash, and the balance via issuance of 454 mln new units in ART. Units were then offered to shareholders of Ascott on the basis of 200 ART units for every 1000 Ascott shares, at 68 cents per unit. C-Land presently owns 46.64% of ART.)

It is also useful to note that ART’s Singapore assets are probably the easiest to dispose of, being located in prime residential locations:

- Somerset Grand at Cairnhill; and
- Somerset Liang Court at River Valley.

The following price levels are useful reference points for ART:
- latest book NAV is $1.51 per unit;
- initial entry price for unitholders of ART was 68 cents;
- Mar ’07 preferential offering of 47.9 mln new units at $1.88 each; and
- Mar ’07 placement of 55 mln new units, as well as 100 mln vendor units by C-Land at $1.90 each. We have been recommending ART, partly as a likely candidate for privatization.

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