Ascendas Real Estate Investment Trust (“AREIT”) is Singapore’s first and largest listed business space and industrial Real Estate Investment Trust (“REIT”) with a portfolio diversified across five major segments of the business space and industrial property market. As one of Singapore’s REIT pioneers, AREIT has played a crucial role in the development of the Singapore REIT sector, providing an attractive platform for investment in business park and industrial properties in Singapore.
AREIT is managed by Ascendas Funds Management (S) Limited, a wholly-owned subsidiary of CapitaLand Limited.
As at 31 December 2020, AREIT is the largest business space and industrial REIT listed on the SGX-ST with total assets and market capitalization of SGD15.1 billion and SGD12.0 billion respectively.
AREIT has a portfolio of properties in Singapore, Australia, the United Kingdom, and the United States which house international and local companies from a wide range of industries and activities, including research and development, life sciences, information technology, engineering, light manufacturing, logistics service providers, electronics, telecommunications, manufacturing services and back-room office support in service industries etc.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 02 February 2021, it was noted that Distributable Income have increased by 6.7% but DPU have decreased by 6.1% year on year respectively. This was mainly due to the increase in unit base is due to the rights issue, private placement and preferential offering, where the applicable number of units increase by 13.6%.
In the short-term, this metric is Unfavorable as the continuous dilution will only be detrimental to existing investors. This however is Favorable for existing investors who have the spare cash to subscribe to the share offerings which are usually at discounts of the current market prices. This provides an opportunity for unitholders to capitalize on, done by continuously subscribing to the excess rights and taking advantage of the dilution.
Occupancy
Occupancy rate as at 31 December 2020 stands at 91.7% This is Unfavorable as it is below my expected healthy occupancy rate of 95% and AREIT have been unable to fully utilize their assets.
A mitigating factor is that this was mainly contributed by the Singapore portfolio, whose overall portfolio occupancy stands at 88.4% as at 31 December 2020 while the value of the investment properties in Singapore represented 66% of the total investment properties managed under AREIT.
Over the last few years and also the recent acquisition of a portfolio of 11 data centers in Europe as announced on 17 March 2021, we could identify that AREIT is shifting their focus overseas which will in turn translate to higher occupancy rates. However this process may take a few years and in the short term, occupancy is unfavorable.
Gearing ratio
Gearing ratio stands at 32.8% as at 31 December 2020. This to me is considered Favorable as it means there is sufficient headroom from the MAS raised limit of 50% to fund new acquisitions through debt. This provides opportunity for AREIT to improve their DPU should they obtain new loans in the current suppressed low interest rates environment.
Interest coverage
The interest coverage for the trailing 12 months stands at 4.3 times. This is Unfavorable in my opinion. However as the general interest rates are hinted to continue to stay low for an extended period of time and AREIT’s low gearing ratio, I am expecting this indicator to turn favorable in the long run as AREIT take up new loans at lower interest rates.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.7 years as at 31 December 2020. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 1.41. This is computed using the closing share price of SGD3.11 on 16 April 2021 and the net asset value per share of SGD2.21 as at 31 December 2020.
The P/B ratio is Favorable for a well managed asset.
Other metrics
Manager
AREIT is managed under CapitaLand Limited, which in my opinion is one of the better managers in the market. It was worth noting that the Manager had taken management fees in the form of new share units throughout the years. While this translates to a dilution of the existing holders, it also demonstrates management’s confidence in the REIT. This is Favorable in view of the long prospects of the REIT.
As announced on 22 March 2021, CapitaLand Limited had proposed to de-merge the property development arm from the REITs. Fundamentally, there are no changes to AREIT. However, my only concern is now now that under the new CapitaLand Investment Management (“CLIM”), should there be a need to raise funds by the asset management arm for new investments, they are unlikely to do so internally under the CapitaLand group which can tap on the property development arm. It may instead have to be raised directly with the shareholders of CLIM, which may result in longer lead times.
Website: CapitaLand shareholders to hold shares in new investment and lodging entity
Future DPU growth
Based on the annual report for FY2020, management have disclosed announced acquisitions of 4 properties in Australia, total value of SGD535.2 million. The total expected occupancy rate is 100% at acquisition date due to rental guarantee provided by the vendors.
It was worth noting though that the total assets of AREIT as at 31 December 2020 amounted to SGD15 billion. The expect acquisitions in Australia will thus only represent 3.5% of the total asset under management. In the short term there is minimal expected impact to the share price but its an indication of management intention to expand overseas.
Tenant profile
AREIT has a well diversified tenant profile with the top 10 customers as at 31 December 2020 only account for about 20.5% of monthly portfolio gross revenue. Furthermore no single property accounts for more than 4.2% of AREIT’s monthly gross revenue. This is Favorable as AREIT will not be too reliant on any single tenant for income.
Dividend yield
At 16 April 2021, with a closing share price of SGD3.11 and dividend payout of SGD0.165 for the full calendar year 2020, this translates to a dividend yield of 5.31%.
The dividend yield is Reasonable. Given that the exposure of this REIT is to business space and industrial properties, these industries tend to be more resilient to Covid-19 and thus more stable. Furthermore, the dividend has been relatively consistent throughout the last few years, which represents a good recurring income for investors.
Summary
Given the current uncertainty in the market, I am still expecting some headwinds resulting in potential decline in share prices. Nonetheless, this is a good behemoth stock that is resilient to the disruptions caused by Covid-19.
I believe that the current share price of SGD3.11 have already priced in the weaker 2020 results and is Undervalued. If using an expected dividend yield of 4.5%, based on the dividend paid in 2020 of SGD0.165 this translates to a share price of SGD3.67.
However, investors will need to keep in mind that AREIT has a history of using equity funding for aggressive expansion. Unitholders have to be mindful of such situations and to maximize this investment, may have to continuously subscribe to the excess offerings. This might not necessary fit the passive dividend investment strategy.
