Ascendas REIT — a good REIT
As one of the earliest and definitely the largest REIT listed on the Singapore Exchange, Ascendas REIT is probably a trailblazer in the REITs space. Based on current performance and underlying trends, this is certainly a REIT to add to my portfolio.
- Strong Business Performance
Over the past 5 years, Ascendas REIT has demonstrated strong business performance with steady increase in key metrics of profitability and returns. The table below summarised the percentage change in these metrics from 5 years ago.
Gross Revenue, Net Property Income and Amount Available for distribution all showed double-digit increases, which underscores the solid fundamentals of the business. The 50% and 40% increases in number of properties and total assets attest to a rapidly expanding business, financed equally between new units issues and increase in total gross borrowings.
While the increase in borrowing may be a cause of concern, I feel that the management of its capital structure is prudent and sustainable. The weighted average maturity of its loans is relatively short at around 4 years. This provides the REIT with capacity to borrow in the longer end of the duration spectrum, should the need arise. Its weighted all-in borrowing costs is also at a good level (3%). It has strong interest coverage ratios (around 7x) and sustainable total debt to EBITDA ratio (around 3x). It is also rated A3 by Moody’s. Oversubscription of its rights issue recently indicated strong investor demand for its units.
2. Good Business Model and Favourable Trends
Ascendas REIT invests in primarily business parks and logistics/distribution real estates. 72% of its properties are in Singapore, followed by 12% in Australia, 10% in the US and 6% in the UK. It achieved an aggregate 90.9% occupancy rate in its properties and a 6% rental reversion rate in FY2019. The profile of its tenants are reasonably well-established companies, especially in its home market in Singapore. The industry breakdown is also well-diversified. Details in below extracts from its FY2019 annual report.
A note on Ascendas’s business model. There is certainly tailwind with respect to the asset class that it is investing in. The demand for logistics, distribution, data centre real estate has been steadily increasing, especially in developed countries (which Ascendas is focused on). This will only increase with higher e-commerce activity and stronger demand for cloud and data servers. The pandemic has only accelerated this trend. Demand for business parks in general and specialised or clustered spaces tailored for a particular industry or sub-industry such as biomedical or media is set to remain strong. The proliferation of start-ups and regional HQs that require their own corporate campus will fuel this demand. The pandemic has also further accelerate the shift of working spaces from city centres to sub-urban locations.
Ascendas REIT should definitely focus on this business park and logistic segment where it has demonstrated notable competitive advantage. As opportunities in land-scarce Singapore become more competitive and limited, it naturally has to expand overseas. Its existing overseas markets present numerous opportunities, though management’s prudence and careful assessment in increasing its investment portfolio will remain imperative to ensure value-creation. This will help to reduce its disproportionate over-reliance on Singapore. Beyond UK, other developed European countries also present significant opportunities for Ascendas.
In terms of governance, Ascendas has a reasonably well-diversified board, as illustrated in the board breakdown below.
While this is encouraging and certainly better than most boards in Singapore, Ascendas can look to further enhance the mix in terms of gender and race/ethnicity. Further, as it accelerate its overseas expansion, the board will need to be comprised of directors with relevant experience in the markets that it is expanding to. They would do well to look beyond Singaporean corporate stalwarts.
Also, Ascendas need to look at making sustainability a competitive advantage, not just a regulatory reporting requirement. The property development and management industry is an industry with a lot of runway for the implementation of sustainability practices. Just as how Ascendas was a trailblazer in being one of the earliest logistics REIT to be listed in Singapore, it now needs to carry that torch again in the area of sustainability. Successfully (and substantially) doing so will not only win it PR brownie points, but put it far ahead of its local and global competitors.
3. Good Stock
The stock has corrected a bit in recent weeks, though set to reach all-time highs. This is not a concern for me as the fundamentals of the business is strong
With a 6% dividend yield on a low-rate environment, this stock is a strong dividend-play stock. It has also done well relative to the broader equity market and real estate market specifically.
All in all, definitely a stock to overweight in my portfolio
