Is Ascendas Real Estate Investment Trust's (SGX: A17U) Share Price of S$3.01 a Buy?
 
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Is Ascendas Real Estate Investment Trust's (SGX: A17U) Share Price of S$3.01 a Buy?

Sudhan P
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At the time of writing, Ascendas Real Estate Investment Trust‘s (SGX: A17U) share price (technically known as unit price for REITs) is at S$3.01.

At that unit price, Ascendas REIT is valued at a price-to-book (PB) ratio of 1.4 and a distribution yield of 5.3%.

Would I buy Ascendas REIT at the current price and valuation?

Let’s explore using my 10-step guide to pick the best Singapore REITs.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

Before we dive into analysing Ascendas REIT, let’s take a quick look at what its business is about.

Ascendas REIT is Singapore’s first and largest listed business space and industrial REIT. In terms of market capitalisation, Ascendas REIT is the largest listed REIT in Singapore right now.

As of 30 September 2019, Ascendas REIT’s portfolio value stood at S$11.1 billion, consisting of 97 properties in Singapore, 35 in Australia, and 38 in the United Kingdom.

The REIT’s portfolio includes business and science parks, suburban office properties, and high-specification industrial properties, among others.

The properties in Singapore, which take up the bulk of Ascendas REIT’s portfolio value, are well-located near major transport nodes. This makes the properties attractive to its users.

Ascendas REIT Singapore portfolio location
Source: Ascendas REIT’s Presentation at DBS Vickers Pulse of Asia Conference

Ascendas REIT is managed by Ascendas Funds Management (S) Limited, a wholly-owned subsidiary of CapitaLand Limited (SGX: C31), one of the largest diversified real estate property companies in Asia.

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

With effect from March 2019, Ascendas REIT has a 31 December financial year-end. Previously, its financial year ended on 31 March each year.

The following table shows Ascendas REIT’s gross revenue and NPI growth from FY14/15 to FY18/19:

 FY14/15FY15/16FY16/17 FY17/18FY18/19Compound Annual Growth Rate (CAGR)
Gross revenue
(S$' million)
673.5761.0830.6862.1886.27.1%
Net property income
(S$' million)
462.7553.7611.0629.4649.68.9%

With the consistent growth in gross revenue and NPI, Ascendas REIT passes my first criterion with flying colours.

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Next is the DPU check.

With the consistent rise in gross revenue and NPI, Ascendas REIT’s DPU has climbed over the years as well.

 FY14/15FY15/16FY16/17 FY17/18FY18/19CAGR
Distribution per unit (Singapore cents)
14.60015.35715.74315.98816.0352.4%

Over the longer time frame, Ascendas REIT’s DPU had grown by 4.8% per annum since listing in FY02/03.

Ascendas REIT DPU growth since FY02:03
Source: Ascendas REIT’s Presentation at DBS Vickers Pulse of Asia Conference

Verdict: Pass

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

For FY18/19, Ascendas REIT had an NPI of S$649.6 million and a portfolio value of S$11.1 billion. This translates to a property yield of 5.8%.

Ascendas REIT passes this criterion as well.

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 30 September 2019, Ascendas REIT had a healthy gearing ratio (also known as aggregate leverage) of 36.2%, which is below my threshold of 40%.

Ascendas REIT Balance Sheet 2QFY19:20
Source: Ascendas REIT 2Q FY2019 Presentation

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

Ascendas REIT had an interest cover of 4.4 times, which is below my threshold of 5 times.

(Note: The screenshot under point 4 above shows interest cover ratio as 5.3x, which excludes the effects of an accounting standard. Including that standard, the interest cover ratio falls to 4.4x.)

Verdict: Fail

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

Ascendas REIT’s portfolio as a whole is more than 90% occupied. To be exact, its portfolio occupancy rate is at 91%.

Ascendas REIT portfolio occupancy 2Q FY19:20
Source: Ascendas REIT 2Q FY2019 Presentation

Its Singapore portfolio’s occupancy rate was at 88.1%, as of 30 September 2019, but it’s still higher than the market average of 84.6% for multi-tenanted buildings.

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

Ascendas REIT’s average portfolio rental reversion was 4% for leases renewed in the 2019 second-quarter.

For its 2019 fiscal year, Ascendas REIT expects to achieve a “positive low single-digit rent reversion” on the back of “current global uncertainty and new supply of industrial properties in Singapore”.

Ascendas REIT portfolio reversion 2QFY19
Source: Ascendas REIT 2Q FY2019 Presentation

For FY18/19, Ascendas REIT had a portfolio rental reversion of 3.7%, which is well above the rate of inflation here.

Verdict: Pass

8. Growth Prospects Check

Ascendas REIT has plenty of opportunities to grow, as seen from the chart below:

Ascendas REIT Growth Potential
Source: Ascendas REIT’s Presentation at DBS Vickers Pulse of Asia Conference

Ascendas REIT acquired 28 business parks located in the US tech-cities of Raleigh, Portland and San Diego in the US in December 2019. The lease structure of the US properties is attractive since the majority are of a triple net lease with an annual rental escalation of 2.5% to 4%.

Another growth opportunity for the REIT is the development of Grab’s headquarters, which is a major one for Ascendas REIT. With an NPI yield of 6.4%, the Grab development sure looks attractive.

New Grab headquarters by Ascendas REIT
Source: Ascendas REIT’s Presentation at DBS Vickers Pulse of Asia Conference

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At Ascendas REIT’s unit price of S$3.01, it is valued at a PB ratio of 1.4x.

Over the past five years, its average PB ratio stood at around 1.2x.

At 1.4 times its historical book value, which is above the average, I feel Ascendas REIT is pricey at the moment.

Verdict: Fail

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At Ascendas REIT’s unit price of S$3.01, it has a distribution yield of 5.3%, which just makes the mark.

Verdict: Pass

The Final Verdict

Ascendas REIT has a final score of 8/10. 

The REIT has plenty of great things going on for it. Some of its investment merits are:

  • Strong historical gross revenue, NPI and DPU growth
  • Strong sponsor in CapitaLand
  • Healthy portfolio occupancy
  • Plenty of growth avenues

However, I’m not comfortable with Ascendas REIT’s high PB ratio to put my money into it currently.

Therefore, I’d place Ascendas REIT on my watchlist.

What Are Your Thoughts on Ascendas REIT?

Come discuss them and more in our Seedly Community under a page specially dedicated to Ascendas REIT (SGX: A17U).

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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