Ascendas REIT: A Good Way To Diversify Your Real Estate Portfolio Internationally

Mar. 26, 2019 8:46 AM ETCapitaLand Ascendas REIT (ACDSF)5 Comments


  • Ascendas REIT is the largest business space and industrial REIT in Singapore.
  • The trust's portfolio is well diversified across three countries, providing some protection against country-specific risk.
  • The trust also has no one property or type of property accounting for an outsized proportion of its rental revenue.
  • The tenants come from a very diverse array of industries, providing it with protection against some event that causes mass bankruptcies in a given industry.
  • The trust pays a solid 5.5% distribution that generally increases over time.
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Ascendas REIT (OTCPK:ACDSF) is a major industrial real estate investment trust based out of the Asian city-state of Singapore, it is also present to a fairly significant degree in Australia. As is often the case here at Seeking Alpha, this trust is greatly underfollowed compared to its American counterparts but this is something that certainly should not be the case. This is because it is just as important for a real estate investor to have international diversification in their portfolios as it is for common stock investors. Ascendas REIT is an excellent way to begin down the path of achieving such diversification and it boasts a solid distribution yield to boot.

As mentioned in the introduction, Ascendas REIT is the largest business space and industrial REIT in Singapore. As of December 31, 2018, the trust had real state assets valued at S$11.100 billion. This is substantially above what the average trust had as of the same date:

Source: Ascendas REIT

The trust's portfolio consists of 171 properties in three countries (Singapore, Australia, and the United Kingdom), although the vast majority of the portfolio is located in Singapore. The United Kingdom is a relatively new market for the trust as it only entered it last year in an attempt to diversify itself away from Singapore. Currently, about 7% of the trust's assets are in the United Kingdom, 14% are in Australia, and the remainder is in Singapore.

There are a variety of different types of properties that a business space and industrial REIT like Ascendas invests in. Here is how the portfolio is invested (as a percentage of portfolio value):

Source: Ascendas REIT

As we can see, this is a very well diversified portfolio, which is definitely something that investors should appreciate. This is because this diversification offers real estate investors the same advantages that diversification offers stock investors. Basically, by having a variety of different property types in its portfolio, which are generally used by different types of tenant, Ascendas REIT is able to insulate itself against a slowdown in a specific sector of the economy.

The trust's tenants do indeed come from a wide variety of sectors, with no individual sector providing more than 15% of the trust's total revenues:

Source: Ascendas REIT

This is likewise a good position to be in as it provides the trust with a certain amount of protection against a slow down in any given industry. After all, if the trust had most of its revenues coming from the financial sector and some event caused mass bankruptcies in that sector then the trust itself may be in trouble. While it does use multi-year leases to reduce the risk of losing a large number of tenants at any given time, leases can be broken by a bankruptcy court or of course if the tenant does not have the cash to pay the rent then nothing can be done. Thus, the trust still has some counterparty risk so it is nice to see that the trust is managing this by diversifying its revenue sources.

In addition to this, no single property accounts for an outsized portion of the trust's revenue. The singularly largest revenue-generating property in the trust's portfolio is the Aperia Mall in Singapore, which is responsible for 5.1% of the trust's revenue.

Source: Ascendas REIT

This is also something that is nice to see. This is due to the protection that this diversity provides against natural disasters (or manmade ones) that could destroy a property or render it unusable for a period of time. While the properties are all insured, such an event would still have an adverse impact on the trust's revenue. As it has limited the percentage of its revenues that come from any single property, the trust has limited its exposure to such an event.

As previously hinted at, one of the nice things about commercial real estate and thus the properties in Ascendas REIT's portfolio is the relatively long-term leases under which the properties are rented. Unlike with residential leases that typically last a year or two, a lease for an industrial property can last for many years. In the case of Ascendas REIT, the portfolio boasts a weighted average lease expiry of 4.4 years, an increase over the 4.3 years that it had in September.

Source: Ascendas REIT

The reason why these long-term contracts are beneficial to Ascendas REIT is that they provide a stable source of cash flow over time. If we have the risk of tenants moving out every year, or even the possibility of it, then it can result in significant revenue fluctuations as one tenant moves out and then that space in the portfolio sits vacant for a few months while the trust looks for a new tenant. This would cause the rental income to vary significantly from month to month, which is not conducive to paying out a high distribution to shareholders. In contrast, Ascendas REIT only has a limited portion of its rental income at risk from lease expirations in a given year:

Source: Ascendas REIT

As we can see here, 18.9% of Ascendas REIT's rental revenue comes up for renewal in the 2019 to 2020 fiscal year (the trust's fiscal year runs from April until March) and another 20.9% comes up in the next year. While these percentages may be higher than in any of the following years, they still do not represent an outsized portion of the trust's total revenue. It also stands to reason that not all of these tenants will choose to vacate the property, due to the cost of doing so, and will renew the lease instead. Thus, it seems unlikely that the trust will see a large negative impact to its income over the next two years; at least, not to any extent that the distribution would be jeopardized.

Speaking of the distribution, Ascendas REIT does boast a fairly solid one, although it does vary somewhat from quarter to quarter. Over the past twelve months, Ascendas REIT has paid out a total of 15.769 Singaporean cents per unit. At the current unit price of S$2.86 per share, the trust yields 5.51%. As just mentioned though, the distribution does vary from quarter to quarter, although it generally increases over time:

Source: Ascendas REIT

Due to the fluctuating distribution, the trust may not be a good investment for those that need a steady stream of income. Although, as we can see above, the distribution does not really change that much from quarter to quarter and U.S. investors would still see the value of the distribution change anyway due to currency fluctuations. Thus, Ascendas REIT could still be a good choice to diversify your real estate portfolio away from the United States.

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.

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