REIT Analysis: A look at Ascendas REIT (SGX: A17U)

To any REIT investor in Singapore, Ascendas REIT needs no introduction. It is one of the pioneer REITs to list on the Singapore market all the way back in 2002. With a market cap of close to S$12.2 billion, Ascendas REIT is also the second-largest REIT on the Singapore market.

In terms of market performance, Ascendas REIT has also performed admirably well over the past 18 years, returning more than 500% returns to IPO investors, or an annualised return of around 10.6% (inclusive of dividends).

Given its standing and performance thus far in the local S-REIT market, Ascendas REIT has often been regarded as a “no-brainer” investment. However, as the saying goes, past performance is not an indicator of future performance.

Thus, I decided to do an analysis of Ascendas REIT to see how its performance has been over the past 5 years and gauge its future growth prospects. If I’m to be honest, Ascendas REIT is not quite a straightforward investment.

Disclaimer: This post should not be used as a recommendation to buy or sell units of Ascendas REIT. Rather its intended purpose is to be a source of insight and education. Any decision to buy or sell units of Ascendas REIT should be taken on the personal accord of the reader. Thus, I take no responsibility for any future loss or gain attributed to the trading of Ascendas REIT. Lastly, I am also not currently vested in Ascendas REIT.

Business overview

As of December 2020, Ascendas REIT has a portfolio of 200 properties amounting to a value of S$13.7 billion. This portfolio consisted of business and science parks, suburban offices, various types of industrial buildings, logistics and distribution centres, and data centres.

In terms of revenue segmentation, much of Ascendas REIT’s revenue comes from its business and science parks and suburban offices.

Do note in 2019, Ascendas REIT changed its fiscal period to follow the calendar year. This is why you would see different periods in the graphs shown. As a reference, Ascendas REIT’s fiscal year was previously from 1st April till 31st March the next year.

As seen, business, science parks and suburban offices and logistics and distribution centres segments were the main revenue contributors in 2020. Looking at Ascendas REIT’s recent acquisitions, I expect this trend to continue in 2021.

Additionally, the revenue proportion of the high-spec industrial and data centres segment might also see a huge boost with Ascendas REIT’s acquisition of 11 data centres in Europe.

In terms of geographical revenue, much of Ascendas REIT’s revenue is still derived from Singapore.

From the above, we can see that revenue derived from Singapore has steadily decreased over the years. With much of Ascendas REIT’s recent acquisitions being overseas, I expect the percentage to drop even further in 2021.

From Ascendas REIT’s revenue segments, we can see that its management has been diversifying its revenue sources over the years, be it in terms of property or geography. With that said, the performance of the business, science park and suburban offices segment would still be the main revenue driver for Ascendas REIT in the near future.

I will now move on to look at Ascendas REIT’s financial performance.

Financial performance

For this section of the post, I will looked at how Ascendas REIT has performed over the past 5 years. More importantly, I will also be looking at Ascendas REIT’s debt profile moving forth.

Top and bottom-line performance

Looking at Ascendas REIT’s past 5 years top and bottom-line results, I have to say it has been pretty stellar.

As seen, all of Ascendas REIT’s financial figures all recorded a healthy CAGR of at least 6%.

With Ascendas REIT’s acquisitions and pipeline of properties to be completed, I expect this positive performance to continue in 2021.

Returns to unitholders

While Ascendas REIT’s financial performance has been quite straightforwardly positive, the same cannot be said of its returns to unitholders.

As seen, while NAV per unit recorded a CAGR of 2%, Ascendas REIT’s DPU has actually been fluctuating. While it might be concerning, I am actually not too worried as there are a few main reasons for this.

The first being that the DPU data shown above is annualised based on the calendar year. As Ascendas REIT’s previous fiscal period did not follow the standard calendar year, there were some calendar years with two weaker quarters as a result of divestments/issue of units. If we were to look at Ascendas REIT’s DPU based upon its previous fiscal period instead, it would have been on a steady upward trend.

Secondly, much of the downward trend of Ascendas REIT annual DPU is due to its forward planning of acquisitions and developments. This means that funds acquired from the placement of new units may not be immediately utilised for income-producing opportunities.

For instance, in late 2020, Ascendas REIT completed a massive S$1.2 billion equity fundraising for the acquisition of future properties, resulting in an enlarged number of units. However, only S$570 Million was utilised in the same year, with the remainder used in the purchase of data centres in early 2021. This resulted in 2020’s DPU being deceptively low.

Lastly, there are currently a few properties in Ascendas REIT’s portfolio that are still undergoing development. Once completed, coupled with future acquisitions, I expect Ascendas REIT’s DPU to go back on a steady upward trend.

Dividend sustainability

Considering Ascendas REIT’s dividend, I would say that it is largely sustainable, with a slight caveat.

As seen, Ascendas REIT’s dividend exceeded its AFFO only once in the past five years. In terms of operational free cash flow (inclusive of divestments), it exceeded twice in the last five years. Putting it in a simpler way, it means that Ascendas REIT’s dividend is covered by both its cash flow and cash generated from daily operations.

It should also be noted that over the past five years, Ascendas REIT has paid out 100% of its distributable income to unitholders as dividends. If we were to look at the distribution statement, there is a significant portion of “distribution from capital”.

Source: Ascendas REIT 2020 annual report

Personally, I am not quite sure what exactly constitutes Ascendas REIT’s “distribution from capital”. Looking at its financial statements is also quite vague as it just states that it is tax-deferred distributions repatriated from Australia, amongst other things such as net income from its US and UK properties and vendor rebates.

Whoever has more knowledge of this please let me know in the comments! It kind of bugs me not knowing the full breakdown of the distribution…

All in all, I do feel that Ascendas REIT’s dividend is largely sustainable.

Financial stability

Looking at the financial and debt profile of Ascendas REIT, I feel that there are no grave concerns.

Ascendas REIT’s aggregate leverage of 32.8% gives it a hefty debt headroom to play around with before hitting the regulatory limit of 50%. With an interest cover ratio of 4.3x, Ascendas REIT is also able to adequately cover its near term debt payments.

The only slight blemish is Ascendas REIT’s rather high average debt cost at 2.7%. However, as of 1Q 2021, Ascendas REIT’s average debt cost has dropped to 2.2%. Its recent proposed €300 Million medium term note at 0.75% interest also shows that the management is taking active steps to reduce Ascendas REIT’s debt cost.

On the debt maturity front, Ascendas REIT’s debt is also considered quite well-spread out.

Source: Ascendas REIT 1Q 2021 business update

As seen, much of Ascendas REIT’s current debt matures between from 2023 to 2026. While there might be worries of a heightened interest rate environment then, I feel that it can be curtailed with Ascendas REIT’s earnings.

Given Ascendas REIT’s acquisitions spree so far, I am optimistic that future earnings would cover any potential rise in interest payments.

Property performance

Having looked at the financial side of things, I will now look at the property side of things. Namely, how well has Ascendas REIT properties perform over the years?

Occupancy rate

Looking at Ascendas REIT’s occupancy rate by geography, the Singapore portfolio is slightly lagging behind.

As seen, the Singapore property portfolio’s average occupancy rate stands at 88.4% in 2020. This was slightly below other countries which had average occupancy rates of at least 90%.

Would this be a problem for Ascendas REIT in the near future? I would say probably not.

Looking at the occupancy rate of Ascendas REIT’s Singapore portfolio over the past 5 years, it has generally been declining.

This decline in occupancy rates also coincides with the drop in revenue contribution from Singapore over the years.

However, despite the rather lacklustre performance of the Singapore properties, it has not really affected Ascendas REIT’s financial results over the years. This signifies that bar an extremely negative result, the occupancy rate of the Singapore portfolio would generally not affect Ascendas REIT’s future growth.

Lease expiry

Having looked at the occupancy side of things, I will now looked at Ascendas REIT’s lease expiry profile. The main aim is to determine if there are any potential near-term risks to Ascendas REIT’s earnings.

From Ascendas REIT’s lease expiry profile, there is definitely some near term risk.

Source: Ascendas REIT 1Q 2021 Business Update

As seen, close to 50% of Ascendas REIT’s rental income is tied to lease renewals in the next 3 years. Amongst these renewals, a huge proportion is in the Singapore business and science parks segment.

Source: Ascendas REIT 1Q 2021 Business Update

While the huge percentage proportion might be worrying, I am quietly optimistic that there would not be a high number of non-renewals.

This is due to the positive rental reversion of the business and science park segment that Ascendas REIT has experienced in the last few quarters.

In addition, there is also limited upcoming supply of business parks space in Singapore.

With this limited supply coupled with positive rental reversion so far, I expect leases to remain pretty stable.

Regardless, I do not think there would be too big of an influence on Ascendas REIT’s future earnings even if the lease renewal performance is bad. This is mostly down to the role of the Singapore properties in Ascendas REIT’s portfolio and the direction that the REIT is heading towards.

Growth strategy and prospects

When it comes to considering Ascendas REIT’s growth strategy and prospects, I will be looking at both the local and overseas perspective.

The Singapore portfolio

In terms of the Singapore portfolio, Ascendas REIT has been slowly trimming off and redeveloping older properties. Most of such properties are in the light industrial & flatted factories segment.

This is not really surprising as a number of such properties had remaining land lease periods of less than 40 years.

Source: Ascendas REIT 2020 annual report

From the above, we can see that there is about S$1.1 billion worth of properties that have lease terms of less than 30 years, although much of it can be renewed for differing periods once the 30 years lease is up.

Personally, I expect most of these properties to be divested in the near future as Ascendas REIT focuses on growing its core property segments.

Based on the recent acquisitions of Singapore properties (which is not much to start with), I expect Ascendas REIT to prioritise business parks with high WALE profiles. Over time, I feel that Ascendas REIT’s Singapore portfolio would transit towards mainly consisting of business & science parks.

In terms of growth prospects, there could be some upside due to the limited property supply and growth in the R&D and technology sectors.

In December 2020, the Singapore government put forth a S$25 billion R&D investment plan for the next five years. This is in line with Singapore’s push to become a “Smart Nation”. Furthermore, growth in biomedical engineering should also prop up the Singapore portfolio performance.

Having said that, based on Ascendas REIT’s past 5 years performance, I still think that growth for Ascendas REIT’s Singapore portfolio would remain relatively subdued.

The overseas market

In recent years, overseas properties have been the main growth driver for Ascendas REIT. In terms of property segments and countries, it can be summarised as such:

  • Australia – Suburban offices and logistics
  • United States – Business parks
  • United Kingdom and Europe – Data centres and logistics

From Ascendas REIT overseas acquisitions, we can see that it is targeting properties in potentially high growth sectors. In addition, most of these properties have a rather high WALE profile, which provides some stability to the REIT’s earnings.

In terms of growth prospects, I am quite optimistic as the acquisitions are related to sectors such as technology and e-commerce. Furthermore, suburban offices may also flourish in a post-Covid, work from home environment.

A successful growth strategy?

Looking at Ascendas REIT’s performance over the past five years, I would say its growth strategy has largely been successful.

We have seen modest growth in its earnings and net asset value. While DPU performance has been slightly subpar, there is definitely room for growth in Ascendas REIT recent acquisitions.

Moving forth, I will be keeping an eye on how efficiently Ascendas REIT refreshes its Singapore portfolio. Performance of the overseas acquisitions would definitely also be crucial in determining Ascendas REIT’s growth trajectory.

All in all, from its performance so far, I do feel that Ascendas REIT is rather well-poised for the future.

Valuation

Having gone through the financial data and growth prospects of Ascendas REIT, I would now look at its current valuation. I will be using both the PB ratio and AFFO yield.

PB ratio

Using a market price of S$2.97, Ascendas REIT’s PB ratio would be 1.34. This is not really far off its five-year average PB ratio.

Source: Morningstar.com

If we were to consider the fair valuation of Ascendas REIT based purely on its PB ratio, it would equate to a market price of $2.87.

Do note that this ‘fair’ valuation based on PB ratio is largely according to market sentiments. Thus, given the long track record that Ascendas REIT has, there is an associated market premium to its share price.

AFFO yield

Using its current market price, Ascendas REIT’s AFFO yield (based on the 2020 figure) stands at 5.54%. If we were to compare it to Ascendas REIT’s capitalisation rate it is not really far off.

While Ascendas REIT does not have an overall capitalisation rate, its capitalisation rates in different countries range from 5.62% to 6.01%. Using a simple average method, it works out to around 5.82%.

Based off a AFFO yield of 5.82%, Ascendas REIT’s fair share price would be around $2.80.

Considering both the AFFO yield and PB ratio, Ascendas REIT’s fair value would be around $2.84.

Conclusion

All things considered, do I think that Ascendas REIT is a good investment?

I would say that it is.

To me, Ascendas REIT is a well-diversified and financially stable REIT with properties catering to high growth sectors. The REIT’s management is also rather astute and their growth strategy has largely delivered positive returns to unitholders.

Growth potential wise, Ascendas REIT also has ample debt headroom to either fund the acquisition of properties in resilient industrial segments or build upon its core business & science parks segment.

However, at its current market price, I do feel that Ascendas REIT is slightly overvalued. Hence, the action I would take is to keep Ascendas REIT on my watchlist and wait for its price to decrease before investing in it.

Are you a potential or current investor of Ascendas REIT? Let me know what are your thoughts in the comments! Do also check out the other REIT analysis posts if you found this post informative.

And…look out for my next post, it could be a topic that has generated much hype in recent times.😉

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