REIT Spotlight is a series where I challenge myself to review every single S-REIT (monkaS) on the SGX in alphabetical order. This is part of my efforts to build a REIT database for myself, which I may share with you all some time down the road. Wish me luck XD
In today’s edition, I will focus on one of the pioneers of the S-REIT sector in Singapore – Ascendas REIT (A-REIT). It debuted on the SGX in Nov 2002 and focuses on industrial properties in Singapore, Australia and the UK.
Note: Technically, the next REIT alphabetically is ARA US Hospitality Trust. However, given that it recently IPO-ed and I’ve nothing to add to my IPO review, I’ll be skipping that REIT as part of this series, for now. Do check out my IPO review here if you would like to know more about that REIT.
As one of the pioneers of the S-REIT sector, A-REIT has grown from its humble IPO portfolio of 8 properties to its current portfolio size of 171 properties. It has executed an aggressive growth focused and opportunistic strategy throughout its history, which has largely benefited long term unitholders. Here is a snapshot of the REIT’s history.
Partnered with Macquarie Goodman
With the S-REIT market in its infancy in 2002, there were little to no property fund management companies in Singapore. Ascendas was a well-known property developer in Singapore back then, but had no expertise in fund management. Recognising this, Ascendas established a task force and visited Sydney to talk to the established players over there as the ASX had experience with listed property funds. It was through this task force that Ascendas found their venture partner Macquarie Goodman Industrial Management.
As such, when A-REIT came public in 2002, it was actually backed by a joint venture between Ascendas and Australia listed Macquarie Goodman (now known as Goodman Group).
Growth by sale & leaseback and build-to-suit
In the early years, A-REIT pioneered the sale and leaseback, and build-to-suit programmes to aggressively grow the REIT.
The sale and leaseback programme’s strategy was to purchase HQs and properties from companies and lease them back to the companies. Companies benefit from freeing up large sums of capital stuck in their properties, while A-REIT benefits from yield accretive acquisitions and DPU increases. Early examples of these sale and leaseback acquisitions include OSIM’s HQ and SingTel’s portfolio of buildings.
The build-to-suit programme’s strategy was similar, just that it was focused on greenfield developments specifically tailored to the needs of the master tenant. Iconic examples of these developments include the Courts Megastore and Giant Hypermart in Tampines.
Being pioneers in this space, A-REIT had first mover advantage with limited competition from other players in bidding for properties / projects. Through these twin engines of growth, A-REIT grew from 8 properties in 2002 to 84 properties as at 31 March 2008 on the back of numerous rights issues and private placements.
In late 2007, JTC Corporation was looking to divest a portfolio of industrial properties and had started a tender process for a REIT manager to manage the portfolio. Goodman Group, fresh from parting ways with Macquarie Bank in 2007, submitted a bid and quickly emerged as a front-runner to be JTC’s REIT manager in January 2008.
This created a potential conflict of interest if followed through as Goodman will effectively be managing 2 REITs that were competing for the same profile of industrial properties. This led to their eventual parting of ways as Ascendas bought out Goodman’s interests in A-REIT and its REIT manager in March 2008.
However, due to the emergence of the 08/09 crisis, Goodman eventually did not follow through with their bid. This led to JTC’s appointment of Temasek’s Mapletree Investments as their REIT manager of choice. JTC and Mapletree eventually postponed the IPO of the REIT due to “volatile market conditions”. What a twist of fate.
Navigating the GFC
After parting ways with the Goodman group in March 2008, A-REIT acquired 2 properties during the GFC – 8 Loyang Way 1 and 31 IBP for a combined $271.8m – in spite of the rapidly deteriorating global financial markets. This pushed the REIT’s aggregate leverage from 37.1% as at 31 April 2008 to a high of 42.2% at 31 Dec 2008.
Faced with a need to recapitalise and pare down debt, the REIT took the difficult step to raise equity funds through a private placement at 7% of volume weighted average price and a 1 for 15 preferential offering.
At this point, A-REIT’s unit price had collapsed more than 40% and was trading at a substantial discount to book value. Naturally the resulting private placement and preferential offering was highly dilutive in NAV per unit and DPU. NAV per unit dropped from $1.84 in FY2008 to $1.61 in FY 2009, while DPU dropped from 14.13 cents to 12.52 cents per unit.
Despite these negatives, it successfully recapitalised the REIT, bringing down its gearing to 34.9% at the end of FY2009 and further down to 31.2% in FY2010 on the back of another private placement.
In the post GFC era, the Singapore market gradually reached saturation. This led to the REIT beginning to look overseas for opportunities as well as opportunities to redevelop or divest Singapore properties to maximise value.
In 2011, the REIT made its maiden investment in China. It was a Business park property costing S$117m. Over the years, 2 more business park / logistics assets were added in Beijing and Shanghai. Interestingly, the REIT did a 180 in 2016, divesting all its China interests to instead buy a portfolio of 26 Australian logistics properties. The REIT further added a portfolio of UK logistics properties in 2018.
This strategy remains in place today, with a majority of the REIT’s acquisitions in Australia and the UK in recent years.
The Singapore portfolio is largely well diversified in terms of asset type and takes up 79% of the overall portfolio. The UK portfolio is largely logistics and distribution centres, while the Australia portfolio is mainly logistics and distribution centres with a small amount of surburban offices.
Top 10 Tenants
The portfolio is diverse, with no single tenant contributing over 5% of Gross Rental Income.
31 Mar 2019
Lease Expiry Profile
The REIT has a weighted average lease expiry of 4.2 years. The Singapore portfolio has the lowest WALE of 3.8 years, followed by Australia with 4.5 years and finally the UK with 9.3 years.
The REIT has averaged a WALE of 4.75 years since IPO. However, WALE has pared down since IPO in line with SIngapore industry trends. There is a slight bump in WALE since 2016 due to ventures into Australia and the UK.
The REIT has an average occupancy of 92% since IPO. Current occupancy stands at 91.9%
31 Mar 2019
Net Property Income / Distributions
The REIT was able to grow DPUs aggressively since IPO till 2008. Growth since then has been much more moderated, probably due to maturity of the Singapore industrial market. Interesting to see the bump in DPUs since 2016, which is when the REIT ventured overseas.
NAV per unit History
The REIT was able to grow NAV / unit since IPO, except during the GFC years of 2009 and 2010.
Price to Book
The REIT has traded within a Price to Book band of 1.0 to 1.4 since the GFC. A-REIT is now trading at 1.31 P/B, close to its historical highs.
Nothing too unusual here, good to see that performance fees are structured to align with DPU growth, aligning the manager to unitholders interest to some extent.
Based on the latest Annual Report as at 31 March 2018, Ascendas holds about 20% of A-REIT. This provides some alignment of interest between sponsor and unitholders, though not by a significant amount.
Competency and Strategy
As one of the REIT pioneers, A-REIT has certainly delivered on DPU and NAV growth since IPO. The only time where they made significant missteps was during the GFC whereby they raised equity which was dilutive to DPU and NAV.
That said, they have a long history of raising capital from the equity markets. Rarely a year goes by without some form of equity fund raising, be it through private placements or preferential offerings. While these fund raisings have largely not been DPU dilutive, just something to keep in mind when investing in the REIT.
Capitaland - Ascendas Singbridge merger
As you may know, Capitaland and Ascendas-Singbridge in the process of finalising their merger. While Capitaland does not have a significant (or if any) portfolio of industrial assets, the financial strength and scale of the Sponsor will substantially grow with this merger.
Having gone through over 16 years of annual reports, I’ve certainly learnt a lot about the REIT and its management. Some facts that stuck to me was on how the REIT started in partnership with Macquarie Goodman and how the industrial REIT market was like prior to the GFC.
With so many years of REIT history under its belt, A-REIT has proven to be a solid counter with great management. The path forward taken by the REIT seems to be overseas expansion and rejuvenation / slow divestment of its Singapore portfolio. Main risks with the REIT would be economic trends in the various countries they are in. Do also bear in mind the management’s penchant to raise equity from the markets.
The REIT, like most of its blue chip counterparts, are trading at close to all time highs in terms of valuation at the moment. We can probably find a better time to invest in this REIT in the future.
Updated: Ascendas REIT Dashboard
If you missed my previous post
Porfolio @ May 2019