Maintain EW and Price Target of S$0.51: ART’s recent FY08 results highlight the increased stress and underlying weakness of the service residence portfolio, particularly in the markets of China and Japan that contribute 23% and 12% of FY08 NPI and where RevPAU is down 15% and 4% YoY, respectively.

Management is well aware of the challenges that lie ahead, but we feel that cost containment can only help so much. “Although the Group’s extended geographical diversification and strong brand recognition will help to mitigate the impact, it will not fully insulate the Group from the fast deteriorating market conditions” – ART management. Faced with such strong headwinds, we see little reason to be invested in ART at present.

FY08 Distributable Income Marginally Below: ART’s top line and operating (NPI) was 6% above our estimate thanks largely to China Olympics contribution in 3Q08 and continued resilience in Vietnam portfolio and higher than expected margins. However, distributable income was 2% below our estimates due to unrealized FX that cannot be distributed. Weakness in underlying portfolio is apparent on a quarterly basis, with 4Q08 NPI -25% QoQ and DPU -35% QoQ and -20% YoY due mainly to lower RevPAU in China and Philippines.

Stick to Large Market Cap, Liquid Reits: In the current volatile market conditions, we recommend investors stick to the large cap, liquid S-reits like CapitaCommercial Trust (S$1.00), Suntec Reit (S$0.67) and Capitamall Trust (S$1.56). With limited refinancing risks in 2009 and a portfolio of prime office assets, CCT is currently our sector top pick with 11.7% FY09e dividend yield. We believe that ART’s higher dividend yield of 12.8% in FY09e is insufficient to compensate investors for the risks inherent in ART’s business – namely; Overseas assets that are susceptible to higher socio-political risks and currency risks and shorter tenancies of an average 7 months compared to 2-3 years for commercial leases.