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SI Research: Five Things To Like About Ascendas REIT
The changes are not reflected in the physical magazine issue #598.
In light of the recent cooling measures and trade war between United States and China, investors have been flocking back to real estate investment trusts (REITs) in search of stability. As investors rotate into Singapore REITs, the FTSE Straits Times REIT Index has outperformed FTSE Straits Times Real Estate Holding and Development Index by registering a two-percent gain over the past two months. On the other hand, the FTSE Straits Times Real Estate Holding and Development Index shed almost 5.1 percent in the same period.
Despite the cooling measures dampening sentiments for developer stocks, Singapore’s economy still grew respectably, expanding 3.8 percent in 2Q18. For the rest of the year, GDP growth is expected to continue to be driven by the manufacturing sector, which grew 8.6 percent in the last quarter. Overall, the Ministry of Trade and Industry forecasts that the Singapore economy will continue growing at between 2.5 percent to 3.5 percent in 2018, albeit moderating from 3.6 percent in 2017.
On the back of healthy manufacturing data and tapering of new industrial property supply, market expects a gradual recovery of the industrial property market as leasing enquiries have improved in recent months. That said, with attention coming back to industrial properties, we take a look into Ascendas REIT (A-REIT) and offer five reasons to why investors should like this industrial REIT.
A Well-Diversified and Resilient Portfolio
(Sources: A-REIT Presentation Deck)
A-REIT is the largest REIT listed on Singapore Exchange with a market capitalisation of approximately $8.2 billion. As at 30 June 2018, A-REIT owns 132 properties from logistics centres to business parks, of which 99 properties are based in Singapore while the remaining 33 properties are located in Australia. A-REIT also boasts a well-diversified tenant base with 1,310 tenants from five different industrial sub-segments. The portfolio protects the REIT from over-exposure to a particular sub-segment and investors can expect a more stable stream of passive income.
On top of that, there is no one property that accounts for more than 5.4 percent of A-REIT’s monthly gross revenue. This helps to reduce the revenue volatility during unexpected circumstances since it is not overly dependable on any particular tenant.
Positive Rental Reversion
In 1Q19, A-REIT’s portfolio registered positive rental reversion of 10.5 percent, mainly achieved by renewed leases in multi-tenant buildings in Singapore. High rent rates were propped up mainly by the business & science park which saw 5.6 percent renewal rates and high-specifications industrial & data centres which have 24.8 percent renewal rates. There were no renewals done in Australia during 1Q19.
This was despite the fact that overall portfolio occupancy slightly dipped from 91.5 percent to 90.5 percent, which was dragged by the newly redeveloped 20 Tuas Ave 1. The redeveloped property was only 51.1 percent leased at the end of 1Q19. Meanwhile, occupancy was also affected by non-renewals at SB Building and 31 International Business Park. At the same time, occupancy at Australia’s properties remained stable at 98.6 percent. This was partly driven by the acquisition of 169-177 Australis Drive and 1314 Ferntree Gully Drive, which have hundred percent occupancy rates.
Nonetheless, A-REIT portfolio’s weighted average lease expiry (WALE) stood healthy at 4.1 years. Investors could expect the overall rental reversion to see improvement in the whole of FY19, as the industry continues to be supported by improving demand-supply dynamics. Meanwhile, the REIT has a further 9.3 percent of gross rental income due for renewal for the remainder of the year and a further 19.7 percent in FY20. The significant portion of lease renewals in the next two years would allow the REIT to capture the upsides of better macro factors.
Foray Into UK
In July 2018, A-REIT has made its maiden foray into the UK through the acquisition of a portfolio of 12 logistics properties for £207.27 million ($373.2 million). Two months after its first deal, A-REIT scales up its UK portfolio with another round of purchase, paying another £257.5 million (S$459.2 million) for 26 other logistic properties.
Following the acquisitions, A-REIT’s asset under management (AUM) would increase 10.9 percent to $11.2 billion. Meanwhile, the acquisitions would further enhance the REIT’s income stability as the UK portfolio would stretch A-REIT’s overall WALE from 4.2 years (as at 31 March 2018) to 4.5 years.
Furthermore, of the 38 UK logistics properties purchased, 35 are freehold properties while the remaining three have at least a 965-year land leasehold. This further strengthens A-REIT as freehold properties now make up 23 percent of the REIT’s asset value, expanding from the previous 16 percent.
Notwithstanding that, the tenant base is also enlarged to include more quality customers such as DHL, Aston Martin Lagonda, Howden Joinery, and Amazon.
While uncertainties of Brexit pose risks to A-REIT’s UK properties, there is still growing demand for supply chain and logistics services owing to the booming e-commerce activities. We are positive that A-REIT is well poised to capitalise on UK’s potential and that the acquisition will be yield accretive. Based on the pro forma as if the acquisitions were completed on 1 April 2017, for FY18 the two UK acquisitions will impact DPU) by $0.22 in FY19.
Healthy Balance Sheet
As of the latest quarter 1Q19, A-REIT’s balance sheet remains robust, with gearing standing at 35.7 percent, of which 72.4 percent of borrowings are on fixed rates. The average debt maturity is 3.4 years and weighted all-in cost of debt is at 2.9 percent.
On 07 September 2018, A-REIT announced private placement of 178 million of new units at $2.54 a piece to raise $452.1 million of proceeds to partly fund the second acquisition in UK and also to fund the development of new built-to-suit (BTS) property in Singapore. Some of the new financing will be used to pare down debt as well. Partially financing its activities through fresh equity, the REIT managers aim to reduce its reliance on debt in this rising interest rate environment. Post-placement and acquisitions, A-REIT’s gearing would be marginally higher at 36.7 percent.
Undemanding Valuation
At the time of writing, A-REIT is trading near the valuations of its selected peers. Based on the current share price of $2.60, A-REIT offers an indicative yield of 6.1 percent and is changing hands at 1.3 times its book value. Its peers’ average yield is slightly higher at 6.8 percent while the average price-to-book value is on par at 1.3 percent.
Despite its lower yield, we continue to like A-REIT given its scale and exposure to the recovering industrial space and logistics sector. Notwithstanding that, the REIT also offers the most diversified exposure whether geographically or with regards to tenant base. With its resource and headroom to capitalise on growing markets, the current valuation is not entirely demanding for A-REIT.
