Ascendas REIT: A Bastion Of Stability Amidst The Market Storm

Apr.15.14 | About: Ascendas R (ACDSF)


The market has seen significant volatility year to date and this may have spooked some investors.

Ascendas REIT appears to offer a bastion of stability in the storm.

Ascendas REIT has one of the most diverse property portfolios in Singapore and has a very wide tenant base.

No single tenant or property accounts for a large percentage of the trust's revenue or income.

The trust's unit price has been remarkably stable over the past year and pays a high distribution.

This year has certainly not delivered the same strong start that many investors have come to expect from the markets over the past few years. While the S&P 500 is largely flat for the year so far (despite significant volatility), one of the top stories that I have been seeing on the major business news networks over the past few weeks is how many of the major momentum names such as the high-flying technology and biotech stocks have been getting crushed. In contrast, many energy stocks (in which I am heavily invested) have barely moved. This may be because commodities prices have been relatively stable. Meanwhile, interest rates have also been on the rise although it seems that each decline in the momentum stocks forces interest rates back down. The reason why I pointed all of this out just now is because of a recent report that I just saw from CIMB about another stock that I follow closely that the bank stated should prove to be a stable holding in a rising interest rate environment. I also believe that it may prove to be more stable than the market as a whole. That company is Singapore's Ascendas REIT (OTC:ACDSF). In this article, I will test to see if the bank and I are correct about this.

Ascendas REIT, commonly called AREIT, is an industrial and business space real estate investment trust based in Singapore. The firm is one of the largest such trusts in Singapore, boasting a portfolio of 103 properties in the Asian city-state. Ascendas REIT's diversified portfolio includes business parks, science parks, hi-spec industrial properties, light industrial buildings, flatted factories, data centers, logistics and distribution centers, and warehouse retail facilities. In addition, the trust also owns two business parks in China. This wide property portfolio diversification gives the trust exposure to much of the Singaporean economy. The trust does not have any exposure to consumers and minimal exposure to retail however, which should provide some protection against an economic downturn since the retail sector is typically one of the first to be impacted by such an event.

The trust's wide diversification also provides Ascendas with protection against a downturn in any single industry in which any of its tenants happen to be in. This is because tenants in any one industry make up such a relatively small percentage of its rental revenue that the loss of that revenue would not have an outsized impact on the trust. This chart shows the different industries that the trust's tenants are in as well as the percentage of its total revenue that the trust derives from each industry:

Click to enlarge

Source: Ascendas REIT

As the chart shows, only the logistics and electronics industries make up more than 10% of the trust's rental income and neither industry is significantly over that threshold. Thus, we can assume that if some economic calamity affects either of these industries to the point that the firms in these industries can no longer afford to pay their rent and that Ascendas REIT cannot repurpose the space that those now defunct firms are leasing for companies in another industry to lease then the trust could lose 10-12% of its rental income. Admittedly, that scenario is incredibly unrealistic and if such an unrealistic scenario results in such a small impact to the trust's rental income then we should have confidence that Ascendas REIT's wide diversification should protect its financial position through all but the worst economic calamities.

In addition to the trust's wide exposure to a variety of industries, Ascendas REIT's large number of properties allows for wide diversification of income from them. In fact, no single property in Ascendas REIT's portfolio is responsible for more than 4.3% of the trust's monthly gross revenue:

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Source: Ascendas REIT

This situation further contributes to the trust's inherent stability. This is because of the disaster mitigation strategy that is inherent by not deriving a large portion of its income from any one property. For example, if some kind of disaster occurred that destroyed one of the trust's buildings then the maximum negative impact to Ascendas REIT's topline revenues that could occur is under 5%. The trust is thus not heavily dependent on any one asset.

The trust is also not heavily dependent on any one tenant for a large portion of its rental revenue. This is also a great benefit for stability as it ensure that any potential financial problems at that one tenant that result in an inability for the tenant to pay the rent will not have an outsized impact on the trust's revenue. As this chart shows, no single tenant accounts for more than 6.2% of the trust's portfolio rental income and even the top ten tenants only account for 22.5% of the trust's rental income.

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Source: Ascendas REIT

As the chart shows, Ascendas REIT's largest single tenant is Singapore Telecom. Singapore Telecom is one of the largest telecommunications companies in the world, boasting a combined mobile subscriber base of 477 million. The company is quite strong and stable and there are likely few companies out there that would have lower counterparty risk. But, for the purposes of our stability analysis, if we assume that Singapore Telecom goes under and cannot afford to pay its rent then the trust will only see its rental revenue decline by a maximum of 6.2%.

Another factor that contributes to the trust's stability comes from the nature of commercial leases such as the ones that Ascendas has with its tenants. Unlike most residential leases, commercial leases typically last for longer than one year. An average length of time would be between two and twenty years. Thus, if an economic downturn begins after the lease has been entered into then it will quite often be over by the time that the lease expires. Thus, the trust will typically collect the same or increasing rent payments straight through the economic downturn. The only problems occur when the tenant's lease expires during a time of economic weakness. Because firms will oftentimes scale back their operations during economic downturns and market rental rates may go down, the trust may have a more difficult time keeping leases that maintain its revenue. For this reason, we like to see staggered expiry dates on the trust's leases so that there is a much lower probability that a large number of the trust's leases will expire during an economic downturn.

Fortunately, Ascendas REIT does have a very spread out lease expiry profile with some of the trust's leases extending out as far as 2027. This chart shows the expiry years of the trust's current leases expressed as a percentage of income.

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Source: Ascendas REIT

As the chart shows, Ascendas REIT does not have an especially high volume of leases expiring in any one year. With that said, the trust does have to renew leases totaling just over 40% of its rental income over the next two years so it could be affected by an economic downturn should one occur in the near-term and should such economic downturn result in either the trust's tenants scaling back their operations or running into financial difficulties.

Fortunately, it does not appear that a near-term economic decline is at hand. Singapore's economy is still quite strong and growing, although its growth rate is slowing. In the fourth quarter of 2013, the Singaporean economy grew at a rate of 4.4% year-over-year. This is significantly faster than the reported rate in the United States during the same period; however, it is slower than the 5.9% year-over-year growth rate that the Singaporean economy experienced in the third quarter. In addition, the Singaporean manufacturing sector also displayed strong growth in the fourth quarter of 2013, growing at a 3.5% year-over-year rate. As with the overall economy in Singapore, the manufacturing sector in the city-state grew at a slower rate in the fourth quarter than it did in the third. However, this is still an environment that creates a positive atmosphere for property rentals. This is evidenced by the increase in the spot market rental index as well as in the general price of industrial properties in the nation. In the third quarter, the URA industrial property price index increased 2.8% in the third quarter, reversing a decline of 0.6% in the second quarter. In addition, the industrial property rental index registered a 4.4% increase in the third quarter, also reversing a decline of 0.1% in the second quarter of 2013. This general increase in the prices of both properties and spot market rents has resulted in many of the tenants that are currently leasing properties from Ascendas REIT to be paying below market rents on their leases. Thus, the trust stands to see positive rental reversions on the leases that are expiring this year. This will result in increasing revenue for the trust going forward and greatly contributes to the trust's ability to generate stable revenues and, by extension, profits.

That essentially establishes the sustainability and stability of the trust's revenues and net property income. But, could the trust units themselves be a nice, stable investment? Here is a one-year chart of Ascendas REIT's trust units, trading on their native exchange in Singapore:

Source: Bloomberg

Investors seeking stability will likely find the Singapore-traded shares to be more desirable than the OTC shares that are traded in the United States. The reason for this is liquidity. Because of the low liquidity in the over-the-counter market, a relatively small order can have an outsized impact on the price. For example, at the time of writing, the ask size of the stock on the OTC is only 200 shares. Thus, an order of more than about $360 will have an outsized impact on the price since the price will need to move up to the next ask price. However, by purchasing the stock on the Singapore exchange where nearly four million trust units trade hands everyday, an investor does not have to worry about such things. Ascendas trades under the symbol A17U on the SGX in Singapore.

As the chart shows, the trust's units have traded for a relatively stable price since declining precipitously early last year. There is little reason for the trust's units to decline further given its stable to increasing revenue base and the overall strength in its macroeconomic environment. Ascendas REIT thus appears to offer a nice "port in the storm" to investors who have been rattled by the overall market volatility as of late. In addition, Ascendas REIT, as with most real estate investment trusts, pays investors a significant distribution to "hide out" in it until the market carnage subsides. At the time of writing, Ascendas REIT yields 6.23%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.