Equity Valuation of Ascott Real Estate Investment Trust

Group 5 Daphne Tessa Lee, Lee Xuan De, Khoo Shi Hui Seph, Wayne Kaiends Kang, Lim Jun Hao

Overview

1. Introduction

2. Ascott Residence Trust

3. Financial Performance

4. Historical Stock Price

5. Valuation (FCFF)

6. Conclusion

Financial Perf.ART Valuation ConclusionIntroduction Historical Stock Price

Introduction

REIT

• Real Estate Investment Trust

• Portfolio of diversified real estates

• Revenue stream from rental payments and capital gains from sale of properties


REIT

• Attractive Features for Investors

✦ High Liquidity

✦ Primary focus on generating a steady stream of income

✦ Tax exemptions for dividends


MAS Regulations

• Distribution of at least 90% of taxable income

• Max gearing ratio of 35% without a credit rating

• Annual re-valuation of properties


TYPES OF REITS

Resilience

Hospitality

Retail

Health Care



• Real estates used for “hospitality” purposes

HOSPITALITY REITSHotels

Serviced Residences

Resorts

HOSPITALITY REITS


Ascott Residence Trust

Ascott Residence Trust

• Hospitality REIT

• Managed by Ascott Limited, a Subsidiary of CapitaLand

• Baa3 credit rating from Moody’s, higher gearing ratio ceiling of 0.60

• Established on 31st March 2006, first Pan-Asia serviced residence REIT


Serviced Residence Industry

• Classified alongside hotels in hospitality industry

• Main difference: Has a

longer stay period


Serviced Residence Industry

• Advantages

✦ Lower average cost for longer periods

✦ Full apartment amenities

✦ Provides personalised services


Ascott Raffles Place Singapore

Strengths of AscottS$1.9b

Market Capitalisation

S$4.0b Total Asset Size

9,985 Units

86 Properties

36 Cities in 13 Countries

Geographically Diversified Portfolio


Strengths of Ascott

• Stability of Income

✦ Extended Business Model

✦ Minimum Guaranteed Income

✦ Stable Occupancy Rates


Strengths of Ascott

• Sustainable Strategies

✦ Yield-accretive acquisition

✦ Active asset management

✦ Capital & risk management


Potential Risks

• Interest Rate Risks

✦ 80% Debt Profile are pegged at 3%

244.3

952.8

2013

80%

20%

S$’m

Fixed Rate 952.8

Floating Rate 244.3


Potential Risks

• Currency Risks

Hong Kong Dollar 693

Great British Pound 199,507

Japanese Yen 3,599

Philippines Peso 96,383

US Dollar 135,286

Singapore Dollar 2,055

Euro Dollar 463,477


Potential Risks

• Sunset Clause

✦ Expiry date 31st March 2015


Financial Performance

Financial Performance

0

20

40

60

80

100

120

140

160

180

200

2009 2010 2011 2012 2013

161.2159.1157.5

101.384.6

Gross Profit ($’mil)


Historical Stock Price

Financial Crisis

Stock Price Analysis

Stock price at all time low of $0.3570


Quantitative Easing


Operation Twist

Stock price recovered to approximately $1.38


Post-Quantitative Easing


Potential rising interest rates


NAV• measures the market-to-market equity value

of a share

0

0.45

0.9

1.35

1.8

ART CDL HT OUE FE HT

0.830.92

1.67

1.23

0.9760.9

1.6

1.38

NAV Share Price


Gearing Ratio• Proportion of debt to equity


Debt Profile


Dividend Per Unit

CDL HTrust: Increase in supply and demand in demand Deprecation of AUD.

Peers’ average as of 2013 : 7.7 cents


Beta Analysis

Beta = 1.3786

Ascott Equity returns

STI Returns


Beta Comparison

Ascott CDL Trust Keppel REITParkway Life REIT

Beta 1.3786 1.3876 1.259 0.619


CAPM Model

β = 1.3786 Rf = 1.50% Rm = 4.805%

∴ Actual Yearly Return = 7.36% ∴ E(Re) = β(Rm - Rf) + Rf = 6.06%


Valuation

FCFF Valuation

• Typical FCFF Model does not work for REIT

• Adjustments to Model


FCFF Valuation

• Adjustments made

Depreciation &

Amortisation Expense

Capital Expenditure

FCFF ≈ AFFO

= Net Operating Income + Accrual (Non-cash) Expense - Capital Expenditure - Working Capital Expenditures


Historical Average Average

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

Revenue 175,522,000 207,223,000 288,653,000 303,841,000 316,609,00011.61%%

YoY Growth -8.76% 18.06% 39.30% 5.26% 4.20%

Cost of Revenue 98,618,000 115,016,000 145,210,000 159,134,000 170,505,00053.64%

Cost of Revenue as % of Revenue 56.19% 55.50% 50.31% 52.37% 53.85%

Total SG&A 1,827,000 2,127,000 3,929,000 3,669,000 4,844,0001.23%

SG&A % of Sales 1.04% 1.03% 1.36% 1.21% 1.53%

Interest Expense (Income) - Net Operating Total 23,237,000 29,977,000 39,495,000 36,478,000 35,014,00012.89%

Interest Expense (Income) % of Revenue 13.24% 14.47% 13.68% 12.01% 11.06%

Unusual Expense - (115,595,000) 3,115,000 621,000 - 0.32%

Unusual Expense % of Revenue* 0.00% -55.78% 1.08% 0.20% 0.00%

Other Operating Expense 278,000 (1,047,000) 2,054,000 (963,000) 642,0000.05%

Other Operating Expense % of Revenue 0.158% -0.505% 0.712% -0.317% 0.203%

Interest Income (Expense) - Net Non-Operating Total (52,441,000) 19,312,000 130,150,000 95,048,000 145,959,00020.38%

Interest Income (Expense) % of Revenue -29.88% 9.32% 45.09% 31.28% 46.10%

Income Before Tax (879,000) 196,057,000 225,000,000 199,950,000 251,563,000

Income Tax 14,630,000 33,094,000 31,222,000 27,367,000 36,209,00014.71%

Income Tax rate - 16.88% 13.88% 13.69% 14.39%

Net Income (15,509,000) 162,963,000 193,778,000 172,583,000 215,354,000

Depreciation 6,088,000 6,539,000 9,105,000 10,799,000 13,511,000-3.60%

Dep % of Revenue -39.255% 4.013% 4.699% 6.257% 6.274%

Capital Expenditure (6,569,000) (24,047,000) (24,569,000) (18,868,000) (62,465,000)-5.00%

Capital Expenditure % of Revenue 42.36% -14.76% -12.68% -10.93% -29.01%

NWC Increase (5,444,000) 22,894,000 (25,536,000) (39,981,000) (25,317,000)0.21%

NWC % of Revenue 35.102% 14.049% -13.178% -23.166% -11.756%

Projection

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Net Income 157,459,066 175,742,379 196,148,655 218,924,398 244,344,741

Depreciation 12,438,640 13,882,949 15,494,964 17,294,157 19,302,263

CapEx (35,194,272) (39,280,844) (43,841,928) (48,932,621) (54,614,418)

NWC Increase (15,587,264) (17,397,174) (19,417,242) (21,671,870) (24,188,292)

FCFF (or AFFO) 119,116,171 132,947,310 148,384,448 165,614,065 184,844,294

WACCTax Rate 14.71%

Weight of Debt 36.38%

Cost of Debt 3.20%

After-Tax Cost of Debt 2.72928%

Weight of Equity 63.62%

Cost of Equity 7.36%

Weight of Preferred Equity 0

Cost of Preferred Equity 0

WACC 5.68% Terminal Growth =

WACC = Wd⋅Rd(1- Tax Rate) + We⋅Re + Wp⋅Rp

1%


Share Price

Firm Value $3,660,722,431

Debt $1,197,084,000

Shares 1,532,180,000 units

11.61% Revenue Growth

Firm Value $3,114,851,229

Debt $1,197,084,000

Shares 1,532,180,000 units

Price $1.61Price $1.25

9% Revenue Growth


Sensitivity Analysis


SHARE PRICE SENSITIVITY ANALYSIS

Weighted Average Cost of Capital

70% 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% 130%

$1.25 3.98% 4.26% 4.54% 4.83% 5.11% 5.40% 5.68% 5.96% 6.25% 6.53% 6.82% 7.10% 7.38%

Terminal Growth

Rate

50% 0.5% 2.02 1.81 1.62 1.46 1.32 1.19 1.08 0.98 0.89 0.81 0.74 0.67 0.61

60% 0.6% 2.09 1.87 1.67 1.50 1.36 1.23 1.11 1.01 0.92 0.83 0.76 0.69 0.62

70% 0.7% 2.17 1.93 1.73 1.55 1.40 1.26 1.14 1.04 0.94 0.86 0.78 0.71 0.64

80% 0.8% 2.26 2.00 1.79 1.60 1.44 1.30 1.18 1.07 0.97 0.88 0.80 0.73 0.66

90% 0.9% 2.35 2.08 1.85 1.66 1.49 1.34 1.21 1.10 1.00 0.90 0.82 0.75 0.68

100% 1.0% 2.44 2.16 1.92 1.71 1.54 1.38 1.25 1.13 1.02 0.93 0.84 0.77 0.70

110% 1.1% 2.54 2.24 1.99 1.77 1.59 1.43 1.29 1.16 1.05 0.96 0.87 0.79 0.71

120% 1.2% 2.65 2.33 2.06 1.83 1.64 1.47 1.33 1.20 1.08 0.98 0.89 0.81 0.73

130% 1.3% 2.77 2.42 2.14 1.90 1.70 1.52 1.37 1.23 1.12 1.01 0.92 0.83 0.75

140% 1.4% 2.89 2.52 2.22 1.97 1.75 1.57 1.41 1.27 1.15 1.04 0.94 0.85 0.78

150% 1.5% 3.03 2.63 2.31 2.04 1.82 1.62 1.46 1.31 1.18 1.07 0.97 0.88 0.80

160% 1.6% 3.18 2.75 2.40 2.12 1.88 1.68 1.51 1.35 1.22 1.10 1.00 0.90 0.82

170% 1.7% 3.34 2.88 2.51 2.20 1.95 1.74 1.56 1.40 1.26 1.14 1.03 0.93 0.84

180% 1.8% 3.51 3.01 2.61 2.29 2.02 1.80 1.61 1.44 1.30 1.17 1.06 0.96 0.87

190% 1.9% 3.70 3.16 2.73 2.39 2.10 1.87 1.66 1.49 1.34 1.21 1.09 0.98 0.89

200% 2.0% 3.92 3.32 2.86 2.49 2.19 1.93 1.72 1.54 1.38 1.24 1.12 1.01 0.92

210% 2.1% 4.15 3.50 2.99 2.60 2.27 2.01 1.78 1.59 1.43 1.28 1.16 1.04 0.94

220% 2.2% 4.41 3.69 3.14 2.71 2.37 2.09 1.85 1.65 1.47 1.32 1.19 1.08 0.97

230% 2.3% 4.70 3.90 3.30 2.84 2.47 2.17 1.92 1.71 1.52 1.37 1.23 1.11 1.00

240% 2.4% 5.03 4.14 3.48 2.98 2.58 2.26 1.99 1.77 1.58 1.41 1.27 1.14 1.03

250% 2.5% 5.40 4.40 3.67 3.13 2.70 2.35 2.07 1.83 1.63 1.46 1.31 1.18 1.06

0.5%

0.7%

0.9%

1.1%

1.3% 1.5% 1.7% 1.9% 2.1% 2.3% 2.5%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

3.98%

4.26%

4.54%

4.83%

5.11%

5.40%

5.68%

5.96%

6.25%

6.53%

6.82%

7.10%

7.38%

Term

inal G

row

th rate

Sha

re P

rice

WACC

Share Price Sensitivity

Sensitivity Analysis


Recommendations

s w

o t

SWOT Analysis• High Income Stability • High Geographical

Diversification of Portfolios • Active Asset Management • Top 5 Largest Serviced

Residence Operator in the World

• Provision of Sunset Clause Decreasing Foreign Earnings

• MAS Ruling to Decrease Gearing Ratio Cap to 45%

• Susceptibility to Currency Risks

• Aggressive Acquisitions over Past Few Months

• Potential Upside • Broadening Earning Base; International Recognition • Development Limit Raised

from 10% to 25%

• Weaker Financial Performance in 2013 ✦ Lowered Revenues ✦ Weak Performances from

Japan & Philippines Properties

• Frequent Rights Issue


Evaluation

• $1.61, without sunset clause

• $1.25, with sunset clause

• Semi Strong Market Efficiency


Recommendations

• HOLD

• Current unit-holders: Consistently strong DPU

• Potential unit-holders: Look for further development on sunset clause


The End

“REITs smell like real estates, look like bonds and walk like equity”

Greg Whyte Morgan Stanley Analyst

THANK YOU!

Date post:	06-Aug-2015
Category:	Economy & Finance
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Equity Valuation of Ascott Real Estate Investment Trust

Economy & Finance