The Singapore and China markets were main contributors to the yoy dip in revenue. However, profitability across the portfolio was maintained. Beijing and Shanghai properties in 1H09 were negatively impacted by travel restrictions due to China communist party’s 60th anniversary. Tianjin was the only bright spot (occupancy ~70%). Vietnam, Philippines and Japan continued its growth.
With its marketing efforts, the management expects the average occupancy rate to increase to 80% by year-end from the current high-60%. However, business travellers are signing up for shorter length of stay of 1-3 mths, and ART sees heightened competition due to the presence of newer serviced residences (SR) for guests to choose from.
Renovations will be done at its Singapore apartments over the next two years, estimated at S$20-30m (debt-funded), with a payback period of 3-4 years. Higher discount rates by valuer led to S$60m writedown mainly for its Japan and China assets. NAV/unit declined to $1.36 from $1.51, bringing its gearing up to 41%. Near term acquisitions seem more unlikely.
The management re-emphasized its preference for refinancing its loans over a rights issue. With our forecasts largely unchanged, prospective DPU yield of 7.2% is not enticing. However, we still like ART’s solid brand and large acquisition pipeline in the longer term. We are downgrading ART to HOLD in view of its spectacular surge in share price recently (+85% ytd). The ex-date for its DPU is on 29-Jul, and payment date is on 28 Aug.
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