Ascendas REIT: Well Diversified Tenants And Leases Means Safety

Summary

• Ascendas REIT has more than 1350 tenants in its various properties with no single tenant accounting for more than 5% of gross monthly revenue.
• The trust's tenants are from a variety of industries, with no single industry making up an outsized portion of the trust's revenues.
• No single property in Ascendas REIT's portfolio accounts for more than 5.4% of the trust's total revenue.
• The trust does not have an outsized portion of its leases expiring in any single year between now and 2032, which should protect its revenue base long-term.
• The trust appears to be well-diversified across relevant metrics which should help ensure its safety going forward.

As many of my long-time readers are probably aware, Singapore's Ascendas REIT (OTC:ACDSF) has been one of my favorite foreign real estate income trusts for quite some time now. The trust bills itself as being a business space and industrial REIT, boasting a portfolio of industrial properties, business parks, warehouses, and even a few retail properties. As one might expect then, this lends itself to attracting a variety of prospective tenants from various industries.

One thing that is important for any business is having a variety of income sources. This is due to the fact that if a given customer that makes up a large portion of income runs into financial problems or switches to a competitor or does any of a variety of other things, then it would have a negative impact on the non-diversified business that is depending on that revenue. This is also the case with REITs, which should not become too dependent on any one tenant. Fortunately, Ascendas REIT has largely been successful at avoiding this problem. As of the end of December, the trust had approximately 1,350 tenants throughout its properties, which is certainly a good number to ensure adequate diversification of revenues. However, it is worth noting that the trust's ten largest tenants account for approximately 20.6% of its gross rental income:

Source: Ascendas REIT

While none of these tenants accounts for 5% or more of the trust's gross rental income, one company is quite close. That company is Singapore Telecommunications (OTCPK:SGAPY), which is the largest telecommunications company in Singapore. This may or may not be a problem. That company is one of the largest providers of both fixed line and mobile communications services in the world, and telecommunications companies, especially large ones, are usually quite stable financially. Thus, the trust probably does not have to worry about Singtel suddenly being unable to pay the rent. It is certainly possible that the phone company will not renew its lease and move to a building owned by another landlord when the lease is up, however. This action would result in Ascendas REIT losing a fairly large portion of its gross rental income should it fail to find replacement tenants (and it would need several tenants or one very large one to replace Singtel).

A second tenant that accounts for a fairly sizable portion of Ascendas' gross rental income is DSO National Laboratories. DSO National Laboratories is a defense research & development firm that develops technological solutions to improve national security. As such, this company is highly dependent on Singapore's government for most of its income. While the government of Singapore is unlikely to run into financial troubles anytime soon, its spending priorities could always change which could result in less money being allocated to a company like DSO National Laboratories. It is, however, unlikely that the company's revenues would ever drop so far as to leave it unable to pay the rent, but there may be a remote possibility here. There is also the risk that DSO National Laboratories will choose not to renew its lease when it expires, which could leave the trust needing to find a new tenant. Fortunately, DSO National Laboratories only accounts for 3.1% of the trust's gross rental income, so the loss of this tenant would result in a small adverse effect than the loss of Singtel.

A second thing that is important for a well run business to do is to diversify its revenues across numerous industries. We can all think of things that caused one industry to run into financial trouble, for example, oil in late 2014, homebuilders in late 2007, or retailers during every recession. When an industry runs into difficulties, any firm in it will be looking to reduce expenses and a business heavily dependent on a single industry could find itself struggling if all of its customers are cutting back. Ascendas REIT appears to be quite aware of this and has, therefore, ensured that its tenants come from a variety of industries.

Source: Ascendas REIT

As this chart shows, Ascendas REIT currently has tenants from more than 20 industries. Unfortunately, just over 20% of its rental revenue comes from either third-party logistics or product distributors, which means that the trust's tenants clearly depend on international trade to make their money. While this is somewhat expected when we consider that 21% of the trust's portfolio (by gross floor area) consists of warehouses, it is still a rather large dependence on tenants from one particular industry. A sharp slowdown in international trade could, therefore, have an outsized effect on the trust, especially if it results in some of the shipping companies that use these warehouses going bankrupt. Ascendas REIT also has a rather large exposure to the financial sector, although this is not atypical for a REIT that leases out office space due to the sheer size of the financial sector relative to others. Nevertheless, this does put the REIT's rental revenue at some risk in the event of another financial crisis or similar event. With that said though, Ascendas REIT does appear to have adequate diversification to protect itself against most foreseeable events.

Another thing that is important for a business is diversity of revenues across the asset base. A business should strive to ensure that all of its assets are productive and that no single asset is responsible for producing the majority of a company's income. This is because an event that causes the loss of that one asset could take down the entire business. In the case of a real estate company, this means that we do not want to see any one building or property providing an outsized portion of a company's rental revenue but rather that its revenues are sourced from assets all across the portfolio. Fortunately, the latter is exactly what we see with Ascendas REIT. This chart shows the percentage of rental revenue that the trust derives from each of the properties in its portfolio:

Source: Ascendas REIT

As shown here, no single property in Ascendas REIT's portfolio accounts for more than 5.4% of the trust's gross rental revenue. The one property that accounts for the 5.4% of revenue is Aperia (a retail and office integrated complex near the Lavender MRT station) and the second largest contributor to gross revenue is ONE@ChangiCity (another integrated complex) at 4.1% of revenue. This is the sort of revenue diversity that we like to see because in the event that something damages or destroys one of those buildings (fire, terrorist attack, etc.), it will not have an outsized impact on the trust's finances. While it is a safe bet that all of these properties are insured, the loss of a property would still impose hardship on the landowner but as we see here, that hardship will be quite limited.

As a business space and industrial REIT, Ascendas enters into commercial leases with its tenants as opposed to residential leases. Commercial leases have a number of advantages over their residential cousins. One of the most important differences from an investor's perspective is that commercial leases are for much longer periods of time. While a residential lease might last for one or two years at most, a commercial lease is typically for a period of several years. This is advantageous for the property owner since the owner essentially guarantees itself a stream of income from the property for an extended period and does not have to worry about constantly finding new tenants. However, it is important for the trust to ensure that its leases end at different times; after all, we do not want to face the possibility of a significant number of customers leaving all at once and potentially causing a large decline in rental revenue. Fortunately, Ascendas REIT appears to realize this as well and has staggered the end dates of its leases so that no one year sees total leases representing the majority of its revenues expiring:

Source: Ascendas REIT

As shown here, Ascendas REIT has staggered its leases so that it has some expiring every year between now and 2032. While this is certainly good to see, there is also a significant amount of front loading here that we do not like to see. As the chart shows, leases representing 59% of the trust's gross revenue expire between now and early 2021. Should a large number of those lessees choose not to renew, it will have a substantial adverse effect on the trust's finances. Fortunately, I do not believe that we have to worry too much about that scenario. As I explained in my last article on Ascendas, the trust boasts properties in some of the most desirable locations in Singapore, so it seems quite unlikely that its tenants will move out solely because they found a more desirable location in which to conduct business. In addition, these locations should allow the trust to find new tenants to replace those that do move out for whatever reason.

As is the case with many real estate trusts, Ascendas REIT has a long history of rewarding its investors through distributions. As of the time of writing, the trust pays a trailing distribution of S$0.15953 ($0.1211) per unit, which gives the trust a trailing distribution yield of 6.16% at the current unit price. This represents an increase from the previous year's level. In fact, the trust has steadily increased its distribution over time, even though it may see some changes quarter-to-quarter:

Source: Ascendas REIT

In conclusion, just like we as investors seek to diversify our assets, so should a company seek to diversify its sources of revenue in order to protect itself from idiosyncratic risk. Ascendas REIT appears to have done that by ensuring that no single tenant or industry accounts for such a large portion of its revenues that it could endanger the trust. The company has also managed to stagger its lease expirations so that it can count on never having an outsized portion of its revenues at risk in any given year. Overall then, this appears to be a well-run and safe way to invest in the Singapore real estate market.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we 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.