Ascendas Reit (“AREIT”) is Singapore’s first and largest listed business space and industrial real estate investment trust. 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 has a well-diversified portfolio of 96 properties in Singapore, 34 properties in Australia, 49 properties in the United Kingdom/Europe and 41 properties in the United States as at 31 December 2021. These properties host a customer base of more than 1,500 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 support office in service industries, etc.
AREIT is listed on several indices. These include the FTSE Straits Times Index, the Morgan Stanley Capital International, Inc (MSCI) Index, the European Public Real Estate Association/National Association of Real Estate Investment Trusts (EPRA/NAREIT) Global Real Estate Index and Global Property Research (GPR) Asia 250. AREIT has an issuer rating of “A3” by Moody’s Investor Services.
AREIT is managed by Ascendas Funds Management (S) Limited, a wholly owned subsidiary of Singapore-listed CapitaLand Investment Limited, a leading global real estate investment manager with a strong Asian foothold.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 08 February 2022, it was noted that DPU have increase by 3.9% year on year despite the increase in applicable number of units by 12.6%. This is Favorable as AREIT have been able to improve their DPU which in turn translates to higher returns for shareholders.
Occupancy
Occupancy rate as at 31 December 2021 stands at 93.2%. Although this was an improvement from prior year occupancy rate of 91.7%, it is below my expected healthy occupancy rate of 95% and AREIT have been unable to fully utilize their assets. Furthermore it has further decreased back to 92.6% as at 31 March 2022. This is thus Unfavorable.
Gearing ratio
Gearing ratio stands at 35.9% as at 31 December 2021 and 36.8% as at 31 March 2022. 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 5.7 times. This is Favorable in my opinion AREIT was able to take advantage of the current low interest rates and increase the interest coverage from prior year. However, with interest rates forecasted to increase in 2022, there is a need to monitor this metric.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.5 years as at 31 December 2021. 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 1.18. This is computed using the closing share price of SGD2.81 on 6 May 2022 and the net asset value per share of SGD2.38 as at 31 December 2021.
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.
Tenant profile
AREIT has a well diversified tenant profile with the top 10 customers as at 31 December 2021 only account for about 18.3% of monthly portfolio gross revenue. Furthermore no single property accounts for more than 4.3% 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 6 May 2022, with a closing share price of SGD2.81 and dividend payout of SGD0.093 for the full calendar year 2021, this translates to a dividend yield of 3.32%. The dividend yield is Unfavorable. The reason for the decrease in dividend yield in FY2021 was due to an increase in the number of units as well as acquisition and divestment fees (paid in units to management) related to certain property transactions.
It is worth noting however, that the dividend paid in the first half of 2022 have increased to be in line with 2020 and the years before that. It will not be surprising for the dividend yield to reach 5.00% in 2022. 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 in the prior years before 2021, which represents a good recurring income for investors. However, we will need to wait and see if a 5.00% yield is achieved.
Key things to note
Interest rate hikes
The Federal Reserve have on 4 May 2022 announced an interest rate increase by 50 basis points to tackle inflation. As a REIT, AREIT is heavily reliant on borrowings to fund their acquisitions, as seen by their gearing ratio of 35.9%. Moving forward, new debts taken by AREIT can be expected to be of higher rates than their current borrowings. This will affect their bottom line as more interest expenses will need to be paid, and an increase in interest expenses will significantly affect their interest coverage ratio.
What is more is that there are hints of future rate hikes in 2022, which may further affect the borrowings of AREIT and cause the dividend yield to be affected, resulting in potential capital losses of share price.
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 SGD2.81 have already priced in the current interest rate hikes and as it is trading near the net asset value per share, it is Undervalued. If using an expected dividend yield of 5.0%, based on the dividend paid in 2020 of SGD0.165 as a benchmark, 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.
