I assign a “Neutral” rating to Singapore-listed industrial REIT Ascendas Real Estate Investment Trust (OTC:ACDSF) [AREIT:SP] or Ascendas REIT. I like the fact that Ascendas REIT managed to deliver positive portfolio rental reversions despite challenging times in 3Q2019 and FY2019, due to the REIT’s focus on business parks & high-specifications industrial properties, and tenant diversification. Furthermore, Ascendas REIT has multiple Distribution Per Unit or DPU growth drivers such as asset enhancement initiatives, redevelopment, and acquisitions.
However, positives for Ascendas REIT have largely been priced in at current valuations, which explains the “Neutral” rating. Ascendas REIT currently trades at 1.51 times P/B, representing a premium to the REIT’s historical three-year and five-year P/B multiples of 1.25 times and 1.20 times, respectively. The REIT also offers a consensus forward FY2020 distribution yield of 5.0%, which is significantly lower than its long-term historical average distribution yield since its listing in 2002 of approximately 6.7%.
Readers are advised to trade in Ascendas REIT units listed on the Singapore Stock Exchange with the ticker AREIT:SP, where average daily trading value for the past three months is over $25 million and market capitalization is above $8 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers (NASDAQ:IBKR), Fidelity, Charles Schwab (NYSE:SCHW), or local brokers operating in their respective domestic markets.
Listed on the Singapore Stock Exchange in November 2002, Ascendas REIT is Singapore’s largest REIT with respect to assets under management (S$12.9 billion) and market capitalization (S$11.5 billion). As of end-December 2019, Ascendas REIT owns 200 properties located in Singapore, Australia, the United Kingdom and the United States, which includes business parks, high-specifications industrial properties, logistics & distribution centers, and light industrial properties among others.
Ascendas REIT’s Asset Portfolio Breakdown By Property Type And Geography
Source: Ascendas REIT’s FY2019 Results Presentation Slides
Note that Ascendas REIT announced in July 2019 that it has changed its fiscal year end from March 20 to December 31, so FY2019 only comprises of the nine-month period between April 1, 2019, and December 31, 2019.
Focus On Business Parks And Tenant Diversification Provides Resilience
Ascendas REIT delivered a strong set of financial results for 3Q2019 (calendar year) and FY2019 (nine months ended December 31, 2019, with the change in fiscal year-end). This was a validation of the REIT’s resilience in challenging times like this, where slowing global economic growth and trade tensions have been a drag on the world economy.
Ascendas REIT’s gross revenue increased +5.9% YoY to S$239.7 million for 3Q2019, while net property income grew +8.5% YoY to S$182.3 million in the same quarter. For FY2019, the REIT’s gross revenue and net property income increased by +5.7% and +10.6% YoY to S$699.1 million and S$537.7 million, respectively, compared with the nine months ended December 31, 2018.
The REIT’s overall portfolio occupancy rate remained stable at 90.9% as of end-December 2019, versus portfolio occupancy rates of 91.0% and 91.3% as of end-September 2019 and end-December 2018, respectively. Notably, Ascendas REIT achieved portfolio rental reversions, defined as change in renewal rates for multi-tenant buildings, of +6.0% and +8.8% for 3Q2019 and FY2019, respectively. Furthermore, the REIT still guided for positive portfolio rental reversion in the low single-digit for FY2020.
Distribution Per Unit or DPU was down -12.3% and -3.3% YoY at S$0.03507 and S$0.11490, respectively. But this is not a cause for concern, as it was mainly attributable to a larger number of units resulting from a rights issue to finance recent acquisitions (to be discussed in a subsequent section of the article), and the fact that newly acquired properties have yet to contribute a full month of rent in 3Q2019.
I attribute Ascendas REIT’s resilience to the REIT’s focus on business parks & high-specifications industrial properties, and tenant diversification.
As per Ascendas REIT’s asset portfolio breakdown chart in the “REIT Description” section of this article, business & science parks and high-specifications industrial properties account for approximately 59% of its total portfolio value. Business parks and high-specifications industrial properties tend to command higher rents and have more stable occupancy rates over time, as these are properties customized for tenants’ research & development and technology-based business activities. In contrast, light industrial properties and logistics & distribution centers are usually standard facilities with low switching costs for tenants.
At the REIT’s FY2019 results briefing on January 31, 2020, Ascendas REIT highlighted that “leasing demand for business parks is strong, as you have seen in our rental reversion numbers.” In 3Q2019, rental reversions for business & science parks and high-specifications industrial properties were +11.8% YoY and +4.4% YoY, respectively, compared with a +0.9% rental reversion for light industrial & flatted factories.
In addition, Ascendas REIT has a diversified tenant base with approximately 1,490 tenants for its 200 properties. As of end-December 2019, the REIT’s 10 largest tenants contribute slightly under 18% of its monthly portfolio gross revenue. Also, Ascendas REIT’s clients come from over 20 industries, and industry concentration risks are limited with no single industry accounting for more than 14% of its monthly portfolio gross revenue.
Furthermore, Ascendas REIT has engaged in geographical diversification in the past years by venturing overseas. As of December 31, 2019, properties located outside of its home market accounted for approximately 28% of Ascendas REIT’s total portfolio value. Specifically, Ascendas REIT’s properties in the United Kingdom, with a relatively long Weighted Average Lease Expiry or WALE of 8.8 years, have helped to increase the REIT’s overall portfolio WALE, which stands at 3.9 years as of end-December 2019.
Multiple Growth Drivers Apart From Positive Rental Reversions
Ascendas REIT is not solely reliant on rental reversions to drive its future DPU growth. The REIT has the ability to leverage on multiple growth drivers such as asset enhancement initiatives, redevelopments and acquisitions.
Ascendas REIT recently completed its asset enhancement works at its ONE@Changi business park in Singapore in October 2019 at a cost of S$4.5 million. New asset enhancement initiatives in the pipeline include Singapore business & science parks, The Capricorn and The Galen. Asset enhancement works for The Capricorn and The Galen are planned to be completed by 1QFY2020 and 2QFY2020, respectively, at a combined cost of S$13 million. At the REIT’s FY2019 results briefing, Ascendas REIT emphasized that asset enhancement works at The Capricorn and The Galen will help to “increase the stickiness so that we can renew better as well as attract new tenants.”
Another growth driver for Ascendas REIT is redevelopment. The REIT announced in January 2020 that it had started the redevelopment of Singapore business park iQuest@IBP in the current quarter, which is expected to cost S$84.3 million and be completed by 3Q2022. As part of the redevelopment, iQuest@IBP’s Net Lettable Area or NLA will more than double from 9,154 sq m now to 19,700 sq m post-redevelopment.
Ascendas REIT targets to attract new tenants in the medical and technology space for iQuest@IBP post-redevelopment. The REIT also guided for an attractive yield on cost in excess of 8% for the redevelopment of iQuest@IBP taking a 10-year view, at its FY2019 results briefing.
Acquisitions are another key growth driver for Ascendas REIT, as the REIT focuses heavily on capital recycling. In September 2019, the REIT divested a light industrial property at 8 Loyang Way 1 in Singapore for S$27.0 million. Subsequently, the REIT completed the acquisition of 28 business park properties in San Diego, Raleigh and Portland and two business park properties in Singapore for S$1,665.3 million, on December 11, 2019.
Ascendas REIT’s Past Divestments
Source: Ascendas REIT’s January 2020 Investor Presentation Slides
In 1QFY2020, Ascendas REIT has already completed the divestment of a high-specifications industrial property, Wisma Gulab, for S$88 million on January 23, 2020. At the same time, the REIT is in the process of disposing a light industrial property located at 202 Kallang Bahru in Singapore for an estimated divestment price of S$17 million. Ascendas REIT has a gearing of 35.1% as of end-FY2019, implying a debt headroom of approximately S$1.1 billion assuming a target 40% gearing. These two divestments should further reduce Ascendas REIT’s gearing, freeing up more debt headroom for new acquisitions.
With Brexit, the United Kingdom leaving the European Union, completed, it is possible that Ascendas REIT will be targeting new acquisitions in the United Kingdom, especially since WALEs for United Kingdom properties are relatively longer.
Ascendas REIT trades at 1.51 times P/B based on its net asset value per unit of S$2.16 as of end-December 2019 and its unit price of S$3.27 as of February 5, 2020. In comparison, the REIT’s historical three-year and five-year P/B multiples were 1.25 times and 1.20 times, respectively.
Ascendas REIT offers consensus forward FY2020 and FY2021 distribution yields of 5.0% and 5.2%, respectively. The REIT’s long-term historical average distribution yield since its listing in 2002 was approximately 6.7%.
The key risk factors for Ascendas REIT are lower-than-expected demand for new industrial space, key tenants either failing to renew their leases or renewing their leases at a much lower rent, a larger-than-expected increase in industrial supply, new regulations that are unfavorable for the industrial segment in the markets that Ascendas REIT has a presence in, higher-than-expected interest rates, and future acquisitions that are not accretive for unitholders.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.