Ascendas Reit (“AREIT”) just announced their half year result for FY2022. There has been some slight improvements and the REIT have announced SGD0.07873 per unit distribution. Overall not too bad as we look deeper into their financials.
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’s multi-asset portfolio is anchored by well-located quality properties across developed markets. As at 31 March 2022, 95 properties are located in Singapore, 36 properties in Australia, 41 properties in the United States and 49 properties in the United Kingdom/Europe. These properties host a customer base of more than 1,600 international and local companies from a wide range of industries and activities, including data centres, information technology, engineering, logistics & supply chain management, biomedical sciences, financial services (back room office support), electronics, government and other manufacturing and services industries.
Investment properties stood at SGD16.6 billion as at 30 Jun 2022.
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. Ascendas Reit 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 02 August 2022, it was noted that DPU have increase by 2.8% year on year despite the increase in applicable number of units by 3.5%. 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 30 June 2022 stands at 94.0% which is an improvement from 93.2% as at 31 December 2021. Although this was an improvement from prior year occupancy rate, it is below my expected healthy occupancy rate of 95% and AREIT have been unable to fully utilize their assets. However, with the occupancy rate have been continuously improving. This metric is thus Neutral.
Gearing ratio
Gearing ratio stands at 36.7% as at 30 June 2022 as compared to 35.9% as at 31 December 2021. This to me is considered Favorable as it means there is sufficient headroom from the MAS limit of 50% to fund new acquisitions through debt. This provides opportunity for AREIT to improve their DPU.
Interest coverage
The interest coverage for the trailing 12 months stands at 6.1 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 continue to increase in 2022 with the series of rate hike by the Federal Reserve, there is a need to monitor this metric.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.9 years as at 30 June 2022. 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 1.23. This is computed using the closing share price of SGD2.96 on 2 August 2022 and the net asset value per share of SGD2.39 as at 30 June 2022.
The P/B ratio is Favorable for a well managed asset.
Dividend yield
On 2 August 2022, AREIT have declared a dividend of SGD0.0787 for 1H2022. This brings the total payouts in the calendar year 2022 to SGD0.154. With a closing share price of SGD2.96 this translates to a dividend yield of 5.20%. The dividend yield is Favorable. However it is worth noting that while the dividend yield is at favorable levels, it is below the dividend yields pre-Covid-19, indicating that it has not recovered although it is in a resilient industry.
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 30 June 2022 only account for about 17.1% of monthly portfolio gross revenue. Furthermore no single property accounts for more than 4.5% of AREIT’s monthly gross revenue. This is Favorable as AREIT will not be too reliant on any single tenant for income.
Key things to note
Interest rate hikes
The last couple of months have seen the Federal Reserve aggressively hike interest rates to tackle inflation, with the latest 0.75 percentage point on 27 July 2022. As a REIT, AREIT is heavily reliant on borrowings to fund their acquisitions, as seen by their gearing ratio of 36.7%. 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 as we near towards the end of 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.
Upcoming Mortgage Crisis
With the Evergrande crisis, it would seem that the property market is taking a hit, especially with the in delinquent mortgages as directly affected by the boycotts in China. While AREIT is not directly affected, it will not be hard to imagine if there is a spillover effect into the property markets around the world. In turn heavily affect the valuations of properties under the care of REITs.
Website: China banks may face $491.5 billion in losses from property crisis
Summary
I believe that the current share price of SGD2.96 have already priced in the current interest rate hikes as well as the possibility of future rate hikes. This is a good behemoth REIT that is resilient to the disruptions.
Nonetheless, given the current uncertainty in the market, I am still expecting some headwinds resulting in potential decline in share prices. A good safety of margin would be for it to trade at 1.1 times its book value, which will translate to a share price of SGD2.62 using the net asset value per share of SGD2.39. It will also translate to a yield of 5.8%.
Investors also will need to keep in mind that AREIT has a history of using equity funding for aggressive expansion and have to be careful of such situations. In order to maximize this investment, unitholders may have to continuously subscribe to the excess offerings. This might not necessary fit the passive dividend investment strategy.
