What Does The Future Look Like For Ascendas REIT?

The share price of Ascendas Real Estate Investment Trust (SGX:A17U) has more than doubled over the last five plus years. The share price recorded returns of about 84% from 1 April 2009 to the closing price on 23 October 2014. Over the past five financial years, the Real Estate Investment Trust (REIT) has also paid out a total sum exceeding 67 cents per unit in dividends. When the dividends and capital returns are put together, this brings the REIT’s returns easily past the 100% mark. In comparison, the capital gains of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 90% for the same duration.

Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. In the case of this REIT, it has 106 properties which are used for either commercial or industrial purposes, or both 16 shopping malls under its umbrella. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as dividends to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.

So, while the returns from Ascendas REIT has been fashionable, as Foolish investors, we should look behind the curtains to understand how sustainable the dividends are, and how it can grow.

A closer look

To get a sense of the resilience of the property portfolio, we can look at the gross revenue by property of the REIT. Ascendas has 106 properties organized into five major sectors.

The Business Park Property sector mainly consists of sub-urban offices, corporate headquarter buildings, and space for research and development. The Hi-Spec Industrial sector consists of co-located high-spec offices with mixed-use industrial space. Data centers also fall under this umbrella. The Light Industrial sector is a reverse of Hi-Spec sector space, housing low office content but higher manufacturing content. The Logistics properties sector consists of warehouses or distribution centres. Lastly, the Warehouse Retail sector is fairly small in the overall revenue picture, and houses the Courts Megastore and the Giant Hypermart.

Below is the growth of the gross revenue for the past five financial years.

ascendas REIT graph 1

Source: REIT earnings supplement information

From the chart above, all five sectors displayed growing gross revenue over the period selected. For the financial year ended 31 March 2014 (FY2013/14), the largest sector would be the Business Park properties which made up about 36% of the gross revenue.

Business Park properties and Hi-Spec Industrial properties have grown 91% and 56.7% respectively over the last five financial years.  The two sectors are the biggest drivers of gross revenue growth.

Part of the reason for this higher gross revenue could be that the Business Park properties sector and the Hi-Spec properties sector is able to command higher monthly rentals of between $3 to $5.45 per square foot (psf). Ascendas has 22 properties in the Business Park properties sector, and 13 properties in the Hi-Spec properties sector. The highest psf comes from Business Parks at the city fringe. In contrast, the Light Industrial properties sector and Logistics properties sector is only able to secure monthly rental rates of about $1.5 per square foot.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the Net Property Income (NPI) of the properties.

ascendas REIT graph 2

Source: REIT earnings supplement information

To get a sense of the bottom line, we can look at the growth of the NPI by sector. The NPI is defined as the gross rental revenue of a property minus all related expenses.

In the case of Ascendas REIT, the NPI has mostly followed the rise of the gross rental revenue. The biggest contributors remain to be the Business Park properties and Hi-Spec Industrial properties which make up 33% and 26% of NPI for FY2013/14.

Finally, Foolish investors might also want to look at the debt profile of the REIT. The gearing ratio, type of funding, and interest coverage ratio may be of interest. To do that, we can look at the REIT’s latest quarterly earnings presentation for the quarter ended 30 September 2014 on 30 June 2014.

Aggregate Leverage 32.6%
Interest Cover* 6.2
Weighted Average Debt Maturity 4.0 years
Unencumbered borrowings 85.8%
All-in Interest Rate 2.7%
Total Borrowings $2.561 billion

 Source: REIT earnings presentation

On top of that, a-REIT has been able to hedge 68.8% of its total borrowings. It’s noteworthy that no more than 20% of its debt is due for refinancing in any single year. It has a fairly competitive all-in interest rate of 2.7%.

Finding sustainable funding may be one of the important factors for an REIT. To this point, with a good amount of loans which are unsecured, therefore the REIT might have the option to pledge their properties in the future to raise capital.

A quick look ahead

Much of the growth for Ascendas REIT for the past five financial years came from its acquisitions. Speaking of this, the REIT has completed the purchase of the Aperia development, a newly completed mixed-use development for sizable $458 million. The new facility has 57 years in remaining lease tenure and currently is ramping up from a low 49.6% committed occupancy. As the property is located at the fringe of the CDB (Lavender MRT), individual investors might want to look out for the impact it has on gross revenue.

Further more, Ascendas REIT has committed to a total of $106.5 million in AEI for the second half of the current financial year. It is also looking to spend $25.6 million in AEI for the next financial year. Finally, the REIT also has a property under development (DBS Hub Asia Phase 2) worth $21.8 million.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the REIT’s share price is supported by the quality of growth that we are looking for.

Ascendas REIT offers the individual investor access to around 1,360 rental leases in a diverse range of business space and industrial space around Singapore. It has steadily increased of distribution per unit (DPU) over the years. Owing to the size of its property, further growth may not match up the years that have past. As such, the share price paid to own this REIT might be a more important factor.

As of 23 October 2014’s closing price of $2.30, Ascendas REIT traded at a price-to-book ratio of around 1.1, and has a dividend yield of around 6.3%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.