We have downgraded our rating for Ascott Residence Trust (ART) to 2 (Outperform) from 1 (Buy). ART’s unit price has outperformed the market over the past three months and, with only 33.3% upside potential to our new six-month target price, it no longer stands out on valuation grounds, in our view.

Looking ahead, we expect ART’s performance to remain resilient, but believe the outlook for 2009 remains highly uncertain.

ART’s 4Q08 distribution per unit (DPU) of 1.69¢ was 29% lower than our forecast. Its revenue was 12% higher than our forecast, but gross profit was 7% lower, due to an increase in direct expenses and a one-time charge.

We have revised up our 2009 DPU forecast by 8%, but revised down that for 2010 by 1.7%. We assume that the manager will take advantage of declining property taxes and utility bills, and cut other operating costs aggressively to preserve profitability. We have lowered our six-month target price, based on our RNG valuation method, to S$0.74 from S$0.75.

Rating downgraded to 2 after strong three-month performance We have downgraded our rating for ART to 2 from 1 following its 4Q08 results announcement (on 23 January 2009). ART’s unit price has outperformed the market (FSSTI) by 13.0 percentage points over the past three months and, with only 33.3% upside potential to our new six-month target price, it no longer stands out on valuation grounds, in our view.

We have made minor revisions to our DPU forecasts and six-month target price. Aside from the earnings uncertainty, we believe ART’s fundamental attractions (well-located assets, an unrivalled global franchise, and strong sponsor) have not diminished.

ART’s 4Q08 DPU of 1.69¢ was 29% lower than our forecast. The quarterly dip in revenue was no surprise, and was even 12% above our forecast. However, the 4Q08 gross profit was 7% lower than our forecast, due to an increase in direct expenses. Moreover, most of the gross-profit shortfall can be attributed to a one- time charge of S$1.3m to the Somerset Liang Court (Singapore) property’s management corporation strata title (MCST) for ART’s share of the refurbishment cost. The other shortfalls (to overall distribution) came from the combined effect of several items, including lower-than-expected other operating income and depreciation.