Ascendas REIT (SGX: A17U) is Singapore’s first and largest listed business space and industrial real estate investment trust with a market cap of S$12.1 Billion. Recently, on 17 March 2021, Ascendas Reit has completed the S$904.6 million acquisition of 11 data centres in Europe, increasing the number of properties into its already well-diversified portfolio.
This REIT, amid the pandemic last year, has performed well due to its position in logistics and data centres which has been resilient. This strong performance translated to a 35% increase in its share price between April 2020 to August 2020. However, after peaking at S$3.54, Ascendas REIT share price has come down to around S$3, a 15% decline.
In this article, we will analyse if Ascendas REIT is still an attractive investment.
Ascendas REIT’s Portfolio Overview
As of 31 December 2020, Ascendas REIT has a portfolio of properties in Singapore, Australia, Europe (mainly in the United Kingdom), and the United States. Among these properties, it comprises Business and Science parks, Integrated development, High specs industrial & data centres, Light Industrial & Flatted Factories, and Logistics
Apart from being geographically diversified, Ascendas’s tenants are also well-diversified with the largest sector, Engineering, taking up only 13% of its portfolio.
Given such diversification, no single property of Ascendas accounts for more than 4.2% of its monthly gross revenue. This is great as it reduces any tenant concentration risk.
Financial Performance
Revenue
Looking at the 5-year trend of Ascendas REIT financial performance, we can see that it is on a general uptrend with growing gross revenue, net property income, and distribution income increasing year on year.
This performance can be attributed to good management running Ascendas REIT and its continuous acquisitions of yield accretive assets to enhance its portfolio.
Occupancy and Lease Expiry
Ascendas’ portfolio occupancy has been quite stable over the years even during the pandemic last year.
Within the portfolio, there was also an average rent reversion of 3.8% for leases renewed in FY2020 which is a healthy sign as it would translate to higher rental income.
While rent reversion is expected to be positive going forwards, Ascendas expects it to be in the low single-digit range for FY2021 in view of current market uncertainties.
Next up, the lease expiry for Ascendas is well spread out over the years. With a healthy portfolio Weighted Average Lease Expiry (WALE) of 4.1 years, we can expect a stable occupancy rate going forward.
DPU and NAV
Although distribution income increased over the past years, we note that distribution per unit has declined slightly by 6.1%.
This decline is mainly attributed to the rights issue, private placement, and preferential offering in 2020 which increased the number of shares in the market.
Even with a bigger pie, there were more people to share this revenue with, as such DPU has declined for the past 2 years. However, I am personally not concerned as the funds received from the preferential offering were used to acquire more properties that are yield accretive. What this means is that, in a year or so, we can expect DPU to increase back as these newly acquired properties start generating income.
To add on to Ascendas REIT’s DPU, I would like to bring attention to its pay-out ratio which is around 53%. This is a healthy number, and it is one I am sure Ascendas can sustain going forward.
Next up, the NAV per unit and total assets graph aims to show you that while Ascendas REIT grew its AUM by acquiring more properties, they have done it such that the shareholders benefit too.
With large acquisitions over the years, it is commendable that Ascendas was able to find properties that are yield accretive and one that increases its NAV per unit over the years.
Financial Strength
Growing revenue is just one factor.
REITs with a strong balance sheet are the ones that can do well even during bad times. As of 31 December 2020, Ascendas REITs gearing ratio is at 32.8%, well below the regulatory limit of 50%.
Apart from that, they have a healthy interest coverage ratio of 4.3x which provides the REIT some headroom if required.
As seen from the figure above, its debt maturity is also well spread out as such I do not foresee any cashflow problem for Ascendas. Of all its properties, it is noteworthy that 91.7% are unencumbered properties which mean most of Ascendas properties are not listed as collateral for any loan.
Strong sponsor
Good REITs are usually those with good backing. For Ascendas REITs, its sponsor is Capitaland which has a 19% stake in it. By having a strong sponsor like Capitaland, Ascendas can potentially have a lower interest rate on loans from financial institutions due to its reputation. Apart from that, it also ensures a pipeline of assets that Ascendas could acquire from Capitaland.
*Typically, there is usually a right of first refusal agreement between the REIT and its sponsor. As such, when the sponsor wants to sell its property, the REIT will be offered the right to purchase it before it is being offered in the open market.
Recent Acquisitions
Starting with 8 properties in Singapore, Ascendas REIT has since expanded to more than 200 properties. Over the last few months, Ascendas has made multiple acquisitions of properties located in Australia, naming a few like a suburban office at 1-5 Thomas holt drive, Sydney Australia, and a new warehouse facility (Under construction) at 500 Green Road, Brisbane Australia.
The latest is the S$904.6 million acquisition of 11 data centres in Europe which aims to enlarges Ascendas REITs exposure to data centres.
*Triple Net lease is a type of lease agreement on a property in which the tenant pays all the expenses of the property, including real estate taxes, building insurance, and maintenance. These payments are in addition to the fees for rent and utilities payable to the landlord (Ascendas). Such arrangement reduces the risk of Ascendas as the cost of maintaining the building is passed onto its tenants.
*Powered Shell is a newly constructed building that is designed specifically for a data centre. These data centres are like an empty shell which contains only the bare infrastructure like power and telecom access to qualify as a data centre. Its tenant will then have to get their own equipment for their needs.
*Colocation centre is a type of data centre where equipment, space, and bandwidth are available for rental to its tenants.
As a result of the recent acquisitions, Ascendas REIT investment in data centres has increased to 10% of its total investment properties of S$15 billion, up from 4%. As the demand for data centres continues to grow due to the increased reliance on data and online applications as well as acceleration in digitalization across industries, I believe that Ascendas is well position to capture this growth.
You may be wondering why Europe was its choice. Well, the reasons for picking European data centres come down to the belief that data sovereignty laws in Europe would benefit the European data centres as companies choose to store data within Europe to serve the large local markets. Furthermore, by acquiring European properties, it further improves the diversity of Ascendas REITs portfolio and offers more freehold land. After the acquisitions, Ascendas portfolio is much more geographically diversified with 60% of investment properties in Singapore, 14% in the United States, 14% in Australia, and 12% in the UK/Europe.
Risk to Ascendas’ recent acquisitions
While investors are euphoric about the recent acquisitions, there are some concerns pointed out by shape-eyed investors and analysts. Given the deal was done with Digital Realty Trust (NYSE: DLR) a REIT that invests in carrier-neutral data centres worldwide, the question that came to mind was why did they decide to dispose of these assets if data centres are the future?
After some digging, I was only able to find a comment from their Chief Investment Officer that this divestment would allow Digital Realty to pay off some debts and reinvest the rest of the proceed.
In addition to that, most of the data centers acquired are more than 10-20 years old. As such, Ascendas may be required to renew the properties to comply with European emission standards. Note that these renewals can be capital intensive, though Ascendas has made provision for it already.
Lastly, another concern is the leasehold status of several properties especially Cateringweg in Paris, France which has left with 39 years tenure. These leasehold properties will most likely lose their value as they near their expiry which would mean it would be harder to divest in the future.
All in all, I am not as concern as I believe Ascendas knows what they are doing. Adding to this, as part of the deal, Digital Realty will provide 1 year of property and facilities management services for the 11 data centers to ensure a smooth transition to Ascendas.
With this knowledge of running data centers in Europe, Ascendas could look into further expansion in the future.
Ascendas REIT’s Valuation
So, is Ascendas a buy now? Let us take a look at its valuation.
Price to book
Ascendas REIT’s current PB Ratio is around 1.33, given that its average PB ratio for the past 5 years is around 1.29, I would say Ascendas REIT is fairly valued as of now.
Comparing its PB ratio with its peers, like Keppel DC Reit and MapleTree Industrial Trust which has a PB ratio of 2.28 and 1.62, we can say that Ascendas REIT is much more undervalued. (Do note that Keppel DC REIT and MapleTree Industrial Trust has a larger proportion of their properties in data centers, as such this could be the reason why it is trading at a much higher premium compared to Ascendas REIT)
Dividend yield
Source: SimplyWall
On the other hand, if you were to look at its dividend yield over the years, with an annualized dividend yield of 4.9% now, I would say Ascendas is slightly overvalued as compared to the average return of 6%.
Looking forward, I believe the yield will recover as the properties Ascendas recently acquired started to generate profits. However, even without an improved dividend yield, I believe the current price now is justified for a REIT that has performed well consistently over the years and also with its increasing stake in data centres.
My opinion
Ascendas is a buy for me. While its share price has been dropping recently, I do not see any problem going forward. Partly because the drop in share price could be attributed to the preferential offering to unitholders at S$2.96 per new unit back in 2020.
Preferential offering is a way REITs raise cash and can be seen as either good or bad. Given that the funding from the offering was mainly to acquire more properties that are yield accretive, I see this as positive news. Going forward, I would consider adding this REIT into my portfolio.
I currently do not have any position in Ascendas REIT.
