Ascott-ART is a blast?

Having developed a keen interesting searching for value in beaten down REITs, i stumbled onto two REITs that interest me the most. They are Ascott Residence Trust and CapitalCommerial Trust. But since i already stated that CCT is one of the best REITs i found soo far and have mentioned the good points about it, i will only mention about Ascott for today's short entry.

A little information about it as stated in their website : Ascott Residence Trust a.k.a (ART) is the first pan-Asian serviced residence real estate investment trust (REIT) established with the objective of investing primarily in real estate and real estate-related assets which are income-producing and which are used or predominantly used, as serviced residences or rental housing properties in the pan-Asian region. In other words, this REITs is just like a trust fund buying condos and rent it out.

ART has an initial asset portfolio of 12 strategically located properties in seven pan-Asian cities (Japan/Singapore/Vietnam just to name a few). The Trust was listed with an asset size of about S$856 million and as at early 2009 ART’s portfolio has expanded to 38 properties with more then 3,550 units in 11 cities across seven countries, with a total portfolio asset value of around S$1.688 billion.

Ok, so let take a quick look at what a value investor will look out for in Ascott.

Trading at a disgusting low unit price of 0.355 as at 25th Feb 2009 9:44am, the value ratios are as follows

- A 75.8% discount to its NAV (Huge discount)

- A 17-20% yield expected to received in 2009 (Estimated DPU of 6-8cents)

- A price to book value of <0.35>

Then upon studying its debts and refinancing issues, ART in my opinion should have no problems in this area, because their gearing remains a low of 38.5% with $614million debts partnering an asset value of $1.688billion. Moreover it has already obtain refinancing for 2009 of $111million with a low interest rate of 3.5% , while the rest of its debts matures in 2011 and beyond.

Other fundamental value i find interesting is that, ART has backing and possible pipeline help from Capitaland for being a service arm to it's group, ART's asset portfolio value was not highly inflated soo much those past few years as compared other REITs like SunTec or CCT, which means to say should there be devaluation ART's portfolio will not be that much affected. Lastly there are only 610million units , which means that DPU is easily maintain with that lower amount of shares, no deferred units, management is pay fairly via the units etc.

So, ART sounds like an excellent REIT with all the little extra positive factors here and there. However upon closer look, ART has one major issue (which is probably why their share price keep plunging to new lows) their portfolio is not resilient. Apparently their business model is mainly to service business travellers and expatriates , attract them to use their condo and thus collect rent from them. The problem here is, these people usually stay for 1 to 12mth in that rented condo while going about doing their businesses in Asia countries. Statistics show that 28% stay only 1 mth, while 39% stay 12mth or longer. Which means to say, ART's DPU depends very much on how long the client stays in their properties and the severity of the current financial crisis destroying businesses prospects here and there, obviously will affect travellers and business people by inducing them to cut down on business trips or find a cheaper alternative then to stay in, rather then staying in the extravagant condo's of Ascotts.

Despite ART's strong brand name and diversed portfolio with prudent asset allocation, their margins for the 4th Quarter of 2008 dropped from 53% to about 44% and DPU drop from 2.12 to 1.69 (20%) for the 4th Quarter this will deal to an one off expense. (Therefore ART is consider high risk investment)

So being a relative young REIT, as compared to other REITs like CCT, the market probably figured out that the DPU for ART is very uncertain and cannot be sustained, they also assume that ART's Revenue/ DPU for the coming years, to drop drastically, so that bags the question... is a unit price of $0.355 a good buy? USING Gordon's dividend discount model, i made the assumption that ART's DPU were to drop by 40% from its last year DPU 08 of 8.8 cents to 5.28cents , forecast it for the next ten years , using a high risk free rate of 3% (US-3mth Treasury bills almost zero hor), with 0% growth for the next ten years, the intrinsic value is 0.43 per unit. Of course one can argue that what makes me think ART can survive for the next 10 years, or why i assume that their DPU is only 5.28cents? Too high la, possible to drop further etc, but an optimist can also argue that i assume their DPU too be too low la,and their growth rate cannot be 0% too conservative etc etc. Whatever the case im sticking to 0.43 as its intrinsic value, i might just spend some of my capital buying a few lots of ART, because i feel that ART is a blast! Whether its in a bad or good sense , hopefully its the latter hehe..