A Little Bargain Buy 4: Frasers Logistics and Commercial Trust

When the share prices of REITs retreated in the early days of November, I made a total of 5 purchases.  After buying MapleTree Logistics Trust, Ascendas Reit (2 tranches), and Ascendas India Trust, I entered the market for Frasers Logistics & Commercial Trust.  

Amid the COVID-19 pandemic, Singapore has strengthened its status as a global logistics hub by optimising on its competitive advantages such as the efficiency, reliability and resilience of its network.  

Just how important is the logistics sector to Singapore’s economic growth?  Very important.

The logistics sector contributed SGD6.8b or 1.4% of Singapore’s GDP in 2019.  This sector is set to grow by leaps and bounds in the years ahead, and investing in logistics REITs is a way to ride this growth wave.

Deputy Prime Minister, Mr Chan Chun Sing, wrote thus on his FB after a visit to DB Schenker Singapore’s Red Lion facility on 27 October:

“The logistics sector is critical to Singapore’s position as a global business hub, allowing us to connect key supply chain nodes to facilitate efficient trade flows, both domestically and internationally.  The sector has been undergoing changes caused by the reorganisation of global supply chains and digitalisation.  COVID-19 further exacerbated these trends but our logistics companies have stayed agile and managed to capitalise on new opportunities, resulting in an overall positive outlook for 2020 and beyond … we saw how the logistics sector has transformed and moved towards higher-value products and services, servicing supply chains … So long as we build on our advantages, I am confident that the logistics sector will remain a bright spark in the Singapore economy.”*

In addition, Singapore is also a member of the Regional Comprehensive Economic Partnership (signed 15 November).  Trade openness is a good thing for the movement of goods, the essence of the logistics industry.  As suggested in a Business Times report, “the clear sector winners for Singapore will be linked around the shipping and logistics ecosystem.”**

So, if now is not the time to invest in Singapore logistics REITs, then when?  

Indeed, now is the time and I’m glad to be able to pick up FLCT when its share price showed some weakness the first week of November.  

Here’s the link to Vince’s latest analysis on FLCT: https://www.reit-tirement.com/2020/11/frasers-logistics-commercial-trust.html

Introduction

Following a merger with Frasers Commercial Trust (FCT), Frasers Logistics & Industrial Trust (FLT) was renamed Frasers Logistics & Commercial Trust.  FLCT appeared on the Singapore stock market on 4 May 2020.

This enlarged REIT, sponsored by Frasers Property Limited, is now the 8th largest S-REIT.  FLCT has a market cap of approximately SGD4.4b.

Circular dated 14.02.2020

FLCT’s investment strategy is to invest globally in a diversified portfolio of income-producing properties used predominantly for logistics or industrial purposes located globally, or commercial purposes (comprising primarily CBD office space) or business park purposes (comprising primarily non-CBD office space and/or research and development space) located

Key Highlights

1. A diversified portfolio: Well-diversified footprint in Singapore, Australia, Germany, the UK, and the Netherlands.  100 properties in different asset classes that will help FLCT ride through good and bad times and generate steady returns.

FY 2020 Q4 report

2. Gross revenue: SGD332m for FY 2020 [no meaningful comparison on YoY basis as FLCT was only formed in 2020).  UP 5.69%, SGD109.6m (4Q 2020) vs SGD103.7m (3Q 2020).

3. Net property income (adjusted): SGD258.3m for FY 2020.  UP 6.92%, SGD83.4m (4Q 2020) vs SGD78m (3Q 2020).

4. Occupancy rate: 97.5% (as at 30.09.2002); logistics and industrial portfolio: 100%, commercial portfolio: 94.3%.

5. Interest coverage ratio: 6.4x.

6. Gearing ratio: 37.4%.  FLCT has SGD1651m of debt headroom to utilise for property acquisitions and become more competitive against its peers.

7. WALE: 4.9 years (as at 30.09.2002); logistics and industrial portfolio: 5.5 years; commercial portfolio: 4.2 years.  Lease expiry profile is well spread out with only 7.9% of gross rental income due for renewal in FY2021. 

8. Net Asset Value per unit: UP 5.77%; SGD1.10 (4Q 2020) vs SGD1.04 (3Q 2020).

9. Distribution per unit: CONSISTENT; SGD0.0712 (FY2020) vs SGD 0.07 (FY2019) vs SGD0.0715(FY2018).

10. Current yield distribution: 5.56%. 

11. Rental Reversion: IMPROVED; -0.1 (4Q 2020) vs -3.9 (3Q 2020).

12. Current PB Ratio: 1.16, just slightly overvalued (share price at SGD1.28 on 16 November).  At my entry price of SGD1.24, it was a 17% drop from its peak price at SGD1.49 … just a small bargain. Buying FLCT at its March low at SGD0.67 would have been a tremendous steal!  I calculated, based on DCF, the fair value of FLCT to be between SGD1.22 to SGD1.31.  

13. Weighted average interest cost:  1.9% per annum

14. Debt Maturity Profile: 3.0 years.

15. Free Cash Flow: UPTREND; 214.81m (4Q 2020) vs 181.781m (3Q 2020) vs 149.492m (2Q 2020).

FY 2020 Q4 report

Why did I buy Frasers Logistics & Commercial Trust?

A. Just too good a REIT to Ignore: A prominent investment guru (not revealing name here) has ranked FLCT the top REIT in Singapore (I use his paid service).  And I find myself not disagreeing with that ranking.

By all accounts, from examining the essential metrics, FLCT does look like a worthy REIT to invest in, if one can look beyond the slightly overvalued 1.2 PB.  FLCT’s performance during the pandemic period has been excellent in spite of the challenging business environment and operating conditions across global markets: improved DPU, revenue, NPI etc.  

I really like it that FLCT is well-positioned to face the continuing uncertain global environment with its resilient portfolio, strong balance sheet and financial flexibility.

B. Portfolio Expansion:  FLCT’s predecessor, FLT, has a proven track record in executing value-accretive acquisitions.  Since its IPO in June 2016, FLT has completed SGD4.4b worth of accretive acquisitions.  This track record looks set to be perpetuated by FLCT.  

What has FLCT done to expand its portfolio thus far?

As of August 2020, FLCT has completed the acquisition of 2 properties: a logistics property in Melbourne (IVE Facility) and a business park in the UK (MAXIS), with the respective initial NPI yields being 5.85% and 6.3% respectively.  Both properties together have a property value of approximately SGD143.2m.

  • THE IVE Facility (Melbourne)

1. A modern and prime freehold logistics property.

2. Entrenches FLCT in Melbourne’s South East Industrial suburb which is popular with investors due to strong market fundamentals, low levels of vacancy, limited supply and favourable demographics.  The eastern seaboard cities of Sydney, Melbourne and Brisbane form a lucrative and much sought-after industrial area by both domestic and global players.  The investment volume in this area remained strong despite the COVID-19 pandemic, generating transacted sales amounting to some AUD1.7b during the first half of 2020.  

3. Lettable area: 14,263 sqm.

4. WALE: 4.9 years (as at 30.06.2020).

5. Occupancy: 100%.

6. Only 1 main tenant (Beware of tenant risk here): IVE Group Ltd, Australia’s leading holistic marketing company.  IVE derives revenue from the provision of marketing services and print communications. Rent from IVE is fixed at an increment of 3% per annum.

  • Maxis Business Park (Bracknell, UK)

1. A freehold high quality business park comprising two office buildings.

2. Anchors FLCT in the Thames Valley, the largest regional economy outside London and a high-tech region in the UK.  This business park benefits from excellent connectivity to key motorways and direct train service to Waterloo Station, London.  In spite of the current very exceptional health crisis, the overall UK business park market continues to have active leasing taking place with approximately 63,000 sqm of “take up” in the first half of 2020.  As such, the UK business park sector is expected to remain an attractive and resilient asset class within the commercial space in the long run.

3. Lettable area: 17,859 sqm.

4. WALE: 6.7 years (as at 30.06.2020).

5. Occupancy: 100%

6. 10 tenants such as Panasonic UK, Allegis Group, Blue Yonder, Cadence Design Systems.  More than 60% of the tenants of the UK Property are in the technology and telecommunication sectors, which adds to the resilience of this UK Property.

Both acquisitions are expected to be accretive and will contribute to stable and regular distributions to the unitholders of FLCT.

Earlier in May this year, FLCT completed the acquisition of 50% interest In Farnborough Business Park.

  • Farnborough Business Park (UK)

1. A freehold aware-winning business park that spans 46.5 hectares.  The business park comprises 14 commercial buildings, including 9 office buildings, two car showrooms, an office-cum-industrial building and two cafes.  The business park has approximately 18,000 sqm of development potential.

2. Farnborough business park is also situated in the Thames Valley area.  It is at the heart of connections, strategically situated minutes from the M3 motorway and the vibrant town centre.

3. Lettable area: 51,006 sqm. 

4. WALE: 5.8 years (as at 30.09.2020).

5. Occupancy: 99.3%

6. More than 10 tenants, and is home to British businesses such as Fluor, Aetna, Redhat, National Westminster Bank and the Royal Aeronautical Society.

FY 2020 Q4 report

C. Unlocking value through divestment: In August, FLCT announced the divestment of the remaining 50% stake in the Cold Storage facility in Queensland at a sale consideration amounting to about SGD150.5m (AUD152.5M), a 12.2% premium above its July 2020 book value. FLCT expects to record a net gain of A$8m from this sale. 

D. Diversified ROFT Pipeline from Sponsor:  FLCT has access to a sizeable ROFR pipeline of more than SGD5b granted Frasers Property.  This is by far the largest ROFR pipeline among the major REITS in Singapore.

What is ROFR?  ROFR is short for right of first refusal (also known as first right of refusal) and is a contractual right to enter into a business transaction with a person or company before anyone else can.  So if Frasers Property decides to sell any of its properties, then FLCT holding the ROFR gets the opportunity to buy the for-sale property(ies) on the same terms first.

What is FLCT looking at in this pipeline from Frasers Property?  In this pipeline which comprises about 2m sqm is a good mix of assets in Australia (36.9%), Europe (27.5%), the UK (24.4%), Singapore (6.6%) and the rest of Asia (4.6%).  In this pipeline, approximately 75% (by NLA) is logistics and industrial properties, while the rest is made up of commercial buildings and business parks. As a high portion of the pipeline are logistics/industrial properties and located overseas, their yields are expected to be accretive for FLCT.

FLCT is also able to leverage on the Frasers Property’s integrated development and asset management capabilities 

E. In Spite of Some Concerns:  

  • Trade Tension between China and Australia

In recent months, China has entered a trade dispute with Australia.  This all began when Australia started to sing the same tune as the USA that China, which is on the rise, must be contained. On 17 November, after weeks and months of trading spats, the Chinese Foreign Ministry spokesman Zhao Lijian made it clear that some in Australia “tend to regard China’s development as a threat”, and that this was “the root cause” of the problems between the two countries.  

Considering FLCT has 57.3% of its revenue from Australia alone, any trade dispute between China and Australia is a case for concern.

Here’s what FLCT has to say in the latest quarter report on this matter: “There are also concerns relating to the deterioration of relationships between both the Australian and Chinese governments and any implications that may arise as a result of any trade restrictions implemented by China. In October 2020, the Australian Government reported a record 7.0% decline in GDP for the June quarter, and anticipates national GDP growth for the September quarter to remain subdued. According to Reserve Bank of Australia in August 2020, the full-year 2020 GDP is expected to contract by around 6.0% given the resurgent outbreak of the virus in the state of Victoria in July 2020 and the associated reintroduction of restrictions on activity, as well as the impact that uncertainty and diminished confidence have on household spending and business hiring and investment plans.”

The operating environment in Australia for FLCT is expected to remain challenging in the months and even years ahead in the midst of deteriorating relationship between Australia and China (Australia’s largest trading partner).  

It is hoped that the signing of the RCEP will lead China and Australia towards settling their escalating trade conflict quickly. 

  • The Pandemic.

Let’s also hope that COVID-19 will not surge in Australia or anywhere else in the world.

In general, FLCT’s industrial and commercial properties have experienced little impact from the spread of the pandemic.  Its retail properties, on the other hand, expect some near- to mid-term impact from any infection resurgences.

  • Foreign Currency Volatility.

FLCT faces foreign exchange risks associated with remitting the various currencies to Singapore for distribution.  Singapore only accounts for 12% of FLCT’s total portfolio revenue.  Nevertheless, FLCT manages foreign exchange volatility on its distributable income with hedging instruments and targets to hedge distributions on a rolling six-month basis. 

Conclusion

So this is it, my last purchase of a SG REIT during market weakness which lasted just about 2 days the first week of November.  

FLCT has been impressive this year in spite of the pandemic and I hope it will continue to impress by generating market-beating returns year after year, and adapt and seize opportunities to grow its portfolio in today’s changing and challenging circumstances.

I’m satisfied, for now, that FLCT is a relatively safe investment that pays a steady dividend.  It will be icing on the cake if this bet on FLCT maintains the potential for share price escalation.

I plan on going long on FLCT and thus any price drop is welcome.

Every second, minute you refuse to invest is a second farther away from your greatness.

Sunday Adelaja, No One is Better than You

** https://www.businesstimes.com.sg/government-economy/rcep-a-shot-in-the-arm-for-singapore-asean-economies

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Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

A Little Bargain Buy 3: Ascendas India Trust

After owning Ascendas Reit, what came next?  Well, the lesser Ascendas … Ascendas India Trust.  Ascendas Reit with a SGD12b+ asset size and a market cap of 11.01b is a behemoth.  Ascendas India Trust (a-iTrust) is comparatively smaller with a market capitalisation of 1.584b.

I consider a-iTrust a good complement to Ascendas Reit.  Ascendas Reit focuses on Singapore, Australia, the UK and the USA, while a-iTrust is a pure India play.

Introduction 

Ascendas India Trust was listed on the SGX in August 2007 as the first Indian property trust in Asia. a-iTrust is not exactly a REIT, but structured as a business trust.  It is, nevertheless, enabled to offer stable income distributions similar to a REIT.

a-iTrust is focused on capitalising on the fast growing IT and logistics industries in India and its principal objective is to own income-producing real estate used primarily as business space in India. 

Its properties provide quality and reliable business space to its tenants. This distinction sets a-iTrust apart from its competitors and helps it to attract and retain prominent tenants that commit to long leases.  As a result, a stable income profile is secured for a-iTrust.

Just for curiosity’s sake, India had her first actual REIT in April 2019, namely the Embassy Office Parks REIT (a joint venture between real estate development firm the Embassy Group and global private equity major Blackstone).  The second to appear on the REIT landscape in India was Mindspace Business Parks REIT listed in August this year.  

Anyway, back to a-iTrust.

a-iTrust’s market Cap is 1.584b (as at 16 November 2020).

It owns 7 world-class IT parks and 1 logistics park in India: the International Tech Park Bangalore, International Tech Park Chennai and CyberVale in Chennai, CyberPearl, The V and aVance in Hyderabad, aVance in Pune and Arshiya warehouses near Mumbai.

For a quick reference to all the major metrics on a-iTrust, take a look at Vince’s write-up: https://www.reit-tirement.com/2020/11/ascendas-india-trust-analysis-5.html

Key Highlights (the Good)

1. A diversified portfolio: Well diversified in India with a total of 13.1 million sq ft of floor area. a-iTrust caters to a diversified tenant base.

FY2020 Q3 report
FY 2020 Q3 report

2. Gross revenue: UP very slightly (0.27%) from a year ago: INR 2559m (3Q FY2020) vs INR 2552m (3Q FY2019).  The very slight increase was due to positive rental reversions which were partially offset by lower utilities and car park income due to COVID-19 lockdown.  However, converted to SGD, gross revenue is DOWN 5%: SGD47m (3Q 2020) vs SGD49.6 (3Q 2019).  Currency exchanges do mess things up. 

3. Net property income: STABLE (INR 2006m (3Q FY2020) vs INR 2007m (3Q FY2019). Again, converted to SGD, NPI is DOWN 5%: SGD36.9m (3Q 2020) vs SGD39m (3Q 2019).

FY 2020 Q3 report
FY 2020 Q3 report

4. Occupancy rate: 96% (vs 99% from same period 2019).  In terms of operations, all a-iTrust’s IT parks have remained open for essential services, even during lockdown period, to support tenant’s critical IT and ITES operations.  The high occupancy rate is supported by a robust outsourcing and offshoring sector as well as the e-commerce and the co-working industries.

5. Interest coverage ratio: 4x.

6. Gearing ratio: 30% as at 30 Sep 2020.  It has available about SGD1017m of debt headroom, and currently holds no perpetual securities.  a-iTrust has the necessary firepower to go out and acquire more assets.

7. WALE: 3.6 years, with 48% of lease expiry occurring in FY2024 and beyond. 

8. Net Asset Value per unit: SGD1.11 UP from an average of SGD1.03 in 2019 and an average of SGD0.89 in 2018 (5 years of growth since 2015).

9. Distribution per unit: UP 23.7% YoY to SGD0.0464 (1H FY2020) from SGD0.0375 (1H 2019).  Actual income distributed rose 36% YoY to SGD $53.1m, bolstered by higher NPI and interest income from its investments in several of its logistics infrastructure firms, lower current tax expenses and a higher provision of Singapore’s GST in 1H FY2019.  Going forward, a-iTrust will make distributions to unitholders on a semi-annual basis, once in end-June and another in end-December.

10. Yield distribution (Trailing): 6.93% vs 10-year average yield distribution of 6.13%.

11. Rental Reversion: No exact figures given but Q3 reports rental reversion as positive and attributes the quarter’s increase in total property income to positive rental reversions.

Key Highlights (the Not-so-Good)

1. Current PB Ratio: 1.24 (Nov 13: 1.38/1.11) vs 5-year average of 0.986 (2015-2019).  Definitely overvalued.  At my purchase price, the PB ratio is 1.18 (35% off its 52-week high at SGD1.83), still overvalued.  At what price would I find it fair and ideal to enter a 2nd position on a-iTrust?  Based on different growth numbers for DCF calculations, I estimated the fair value of a-iTrust to be between SGD1.09 to SGD1.22. Its share price went as low as SGD1.01 end March 2020.  It would have been a good time then to pick up a-iTrust, but as with almost REITs in Singapore, the train has long left the station.

2. Weighted average interest cost: 5.5% per annum vs 6.0% (3Q 2019).  

3. Debt Maturity Profile: Average debt duration of 2.45 years which is considered short.  6%, 31.7%, and 27.6% of current debt come due in 2021, 2022, and 2023 respectively.  

4. Free Cash Flow: DOWN 15.36% YoY to SGD129.5m (1H FY2020) from SGD152.998m (1H FY2019).  However, FCF has been on the uptrend since 2015 with FCF at SGD87.505 (2Q2015)

Why did I buy Ascendas India Trust?

A. Significant Growth Outlook:  Since its IPO days, a-iTrust has shown excellent growth track record, registering a 11% CAGR.

FY 2020 Q3 report

Since listing, a-iTrust has developed 5.0m sq ft of commercial space from its land bank.  It continues to hold substantial land in Hyderabad, Bangalore and Chennai, with total development potential of 7.7m sq ft. 

What does a-tTrust have currently in its development pipeline?  

There are 3 areas to explore here: development work on its land bank, and acquisition of accretive assets from third parties and a-iTrust’s sponsor, CapitaLand Limited.

What is a-iTrust currently doing with its land bank?

1. In Bangalore, a-iTrust is redeveloping International Tech Park Bangalore (ITPB) to maximise the leasable space, rejuvenate the park, and leverage on the strong demand in Bangalore. The redevelopment of ITPB would unlock significant value for Unitholders as it increases the development potential without incurring incremental land cost. Construction of MTB5 (0.7m sq ft) is almost near completion, and is 100% pre-leased to a leading IT services company.  Another additional 3.1m sq ft of development potential within ITPB will be developed in phases over the coming years. 

2. In Hyderabad, a-iTrust has already begun redeveloping International Tech Park Hyderabad (ITPH).  This redevelopment project takes place in phases over the next 7 to 10 years to increase the leasable area from 1.5m sq ft  to 5.0m sq ft.  a-iTrust has already commenced Phase I of the redevelopment, a new 1.36m sq ft multi-tenanted building. The construction is expected to be completed by the second half of 2021.

3. In Chennai, CyberVale has a 4.4 acres vacant plot with the potential to build a 0.4 million sq ft IT building. a-iTrust will commence construction here when it has clear visibility of leasing demand in this micro-market. 

What is a-iTrust currently doing on the acquisition front?  a-iTrust currently has 10 projects with third party properties:

1. 2 buildings (aVance 5 and aVance 6) at aVance Hyderabad.  Of the 10 buildings on site, a-iTrust already owns aVance 1 to aVance 4.

2. 2 buildings under construction (aVance A1 and aVance A2) at aVance Business Hub 2 at Hyderabad.  Further construction of aVance A3 to aVance A5 is in the acquisition plan.

3. 2 buildings (1 and 2) at Aurum IT Sez at Navi Mumbai.  Building 1 is already 46% pre-committed and building 2 is up for completion in 1H 2021.  a-iTrust has right of first refusal on the 3rd building on site.

4. Phase 1 and 2 acquisitions at BlueRidge 3 at Pune.  This is in reference to an IT building which is in the process of construction.  Acquisition of 1.4m sq ft under phase 1 and acquisition of 0.4 sq ft under phase 2 is due 2H 2021 and 2H 2023 respectively

5. 7th warehouse at Arshiya Panvel in the logistics sector in Arshiya Free Trade Warehousing Zone (FTWZ) located at Panvel, near Mumbai.  What is so special about this acquisition of warehouses at Arshiya FTWZ?  a-iTrust has entered into an operating lease arrangement for a 6-year term at this key warehousing hub, thus offering it diversification into the fast-growing warehousing sector.  These warehouses are already operating at full occupancy with key tenants such as DHL Logistics, Huawei and Cisco Systems.  Under the lease agreement, a-iTrust has been granted the right to co-finance, and also the exclusive right to acquire future development in the FTWZ (an estimated potential of 2.8m sq ft).

6. 1 warehouse at Arshiya Khurja at NCR (National Capital Region).  This income-producing warehouse has a total floor area of about 0.2 million sq ft.  The warehouse is also part of a FTWZ (spread over about 127 acres of freehold land).   This acquisition enables a-iTrust to grow its warehousing footprint in North India, and allows it to benefit from key infrastructure projects like Jewar International Airport and the Dedicated Freight Corridor coming up in the vicinity.  The warehouse has attracted multinational customers, including ZTE, Corning, CFM Aircraft Engines, among others.  Within the FTWZ facility, the vendor (Arshiya) has two existing warehouses and substantial land bank to build additional warehouses.  a-iTrust has entered into agreement with Arshiya with an option to acquire the existing warehouses and fund the construction of future warehouses within the FTWZ (about 3.6m sq ft), and to acquire these warehouses when completed.

FY 2020 Q3 report

What does CapitaLand, the sponsor, have to offer a-iTrust to meet its development objective?

CapitaLand has granted a-iTrust the Right of First Refusal (ROFR) to acquire its stake from 2 entities, upon project completion and stabilisation: 

1. Capitaland India currently holds majority stake in International Tech Park Pune, an IT SEZ in Pune, with 1.9 million sq ft of completed space and 0.4 million sq ft under development.

2. CapitaLand India owns a 30% stake in Ascendas India Growth Programme (AIGP), a real estate investment programme that targets business space developments.  The AIGP, with a target asset size of S$600 million, will invest in real estate in India, focusing on business space.  Target cities include Bangalore, Chennai, Delhi National Capital Region, Hyderabad, Mumbai, and Pune. 

Apart from these 3 different levers of portfolio development, a-iTrust is also actively evaluating acquisitions in the data centre space in order to capture a part of this fast-growing segment in India.

I like how a-iTrust is diversifying into logistics and data centre spaces.

B. India, the offshoring destination: Yes, India is the ultimate offshoring destination for many companies that seek to reduce their overhead expenses.  From software developers to the manufacturing industry and from the financial sector to healthcare providers, companies are keen to leverage the benefits of offshoring to India.

There is no data from a-iTrust that says the majority of its tenants provide offshore back-office services to companies in the US, Europe and other global establishments, but I guess I can safely assume so, else why would companies such as Applied Materials, Bank of America, Soceite Generale and United Health Group be running operations out IT parks and buildings in India?

India has gained global confidence with major corporations opting to offshore to India for these reasons*:

1. Low cost,

2. Quality of expertise in information technology and access to superior talent pool, 

3. Clear communication and good connectivity with the rest of the world,

4. English language advantage,

4. Timely delivery and fast turnaround times,

5. Extended support and maintenance,

6. Reduction of need to invest in non-core business competencies,

7. Peace of mind to focus on core competencies, and

8. A relatively stable political environment. 

As the business process outsourcing (BPO) keeps growing in India, the demand for IT parks and buildings will rise, and this works in favour of a-iTrust’s operation.  The high occupancy rate of a-iTrust’s properties attests to this.  Just as no other country can replace China as the world’s factory in the next one or 2 decades or even longer, no other country can replace India as the world’s BPO capital. 

So it is safe, I would say, to keep faith with a-iTrust’s business operations and overall profitability as the BPO industry grows further in the land which boasts of a digital-savvy populace and a connected economy.

C. In spite of currency risk (and other risks): As a result of having operations in 2 countries (Singapore and India), a-iTrust is exposed to foreign currency risk.  It earns income in Indian Rupee (its functional currency) but makes distribution to Unitholders in Singapore Dollar (its reporting currency).  

To mitigate the risk of large currency fluctuations in the period before income is repatriated to Singapore, a-iTrust enters into monthly forward contracts to hedge income that will be repatriated. The currency exposure as a result of borrowing in SGD, HKD and Japanese Yen to fund developments and/or acquisitions in India is managed through cross-currency swaps and derivatives.  At least 50% of its borrowings is hedged to Indian Rupee. As at 31 December 2019, 29% of the a-iTrust’s total borrowings were exposed to currency risk as a result of its exposure to SGD borrowings. 

Apart from currency risk, a-iTrust (like most other REITs) also faces credit risk, interest rate risk, refinancing risk, etc.  a-tTrust’s management has been a capable and efficient one and they have a slew of measures to deal with these risks.  The management has been rather prudent in managing a-iTrust’s risk exposures proactively.

D. In spite of exchange rate exposure: As an investor, I’m also concerned about exchange rate exposure. As mentioned earlier, a-iTrust earns income in Indian Rupees but pays dividend in SGD, and is susceptible to forex uncertainty.

India has a rising current account deficit which leads ultimately to currency depreciation.

If I remember what I learnt from Econs classes aeons ago: 

1. Value of imports exceeds value of exports in India.

2. More Indian Rupee converted to other currencies to pay for imports resulting in current account deficit.

3. Oversupply of Indian Rupee in forex markets.

4. Depreciation of Indian Rupee against other currencies in a free-floating system.

This is fundamentally a macroeconomic issue in India and there is nothing very much a-iTrust can do about it.   I hope this doesn’t come to a stage where the depreciation of the Indian Rupee outstrips a-iTrust’s NPI growth.  A lower NPI growth will impact dividend distribution (set in SGD) negatively.

Conclusion

Covid-19 has certainly done a number on a-iTrust.  The nationwide lockdown from 25 March 2020 had an adverse effect on a-iTrust’s business.  At that time, the outlook was bleak.  The management then depicted a scenario where the weak economic conditions brought about by the pandemic could lead to reduced demand for office space and resulting eventually to lower occupancies, softening of rents and even latently to higher bad-debt provision.

However under the current “Unlock 5.0” guidelines, the Indian economy is slowly reopening.  a-iTrust’s asset class of IT parks and logistics facilities have weathered the onslaught of the pandemic well, and I’m pretty optimistic of the relative resilience of a-iTrust’s portfolio.

Judging from its past record and current growth plan, a-iTrust might just turn out to be an outstanding investment for me.  Definitely keeping my fingers crossed!

Never invest in stocks with borrowed money or a faint heart. Both are fatal

Manoj Arora, The Autobiography of a Stock

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Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.

A Little Bargain Buy 2: Ascendas Reit

Bargain: a thing bought or offered for sale much more cheaply than is usual or expected (Oxford English Dictionary).

Someone on FB commented on my previous post on my purchase of Mapletree Logistics Trust.  The question was how could I consider a stock that offers a distribution yield of “3.67% vs 10-year average yield distribution of 6.8%” a bargain buy?

That’s a good question, and I appreciate it.

As I mentioned in that blog post, I didn’t, and still don’t, consider MLT a cheap stock.  Based on PB, MLT is overvalued. Based on dividend yield, for those who are looking for dividend yield of 5% and above, MLT is probably not worth a hoot. 

However, I was looking at MLT’s stock price from a “discount” perspective, from the drop from its 52-week high.  I was able to buy MLT a couple of weeks ago at a 12.67% “discount” off its 52-week high of SGD2.21.  I was definitely happy that I did, although I didn’t break into song and dance over that purchase.

There is no question that MLT at current 1.75 PB is not cheap.  However, I was willing to part with some money if only just to have a part in its growth potential, earn dividends in the long run, and hope for capital gains as well. About 13% off the peak price marked an entry point for me.  It was to me a bargain buy for an excellent stock, the high PB and apparently unappetising dividend yield of 3++% notwithstanding.  

Different people look at things differently.  The price that I consider and that works for me might not be one that earns the approval of another.  It’s okay … different folks, different strokes.  So do whatever rocks your boat, have your price plan out and execute it accordingly.  And may you prosper every step of the way.

Value investing was once the purchase of tangible assets at levels below their market value. Value investing today is buying sustainable competitive advantages at a good price.

John Kay, Long & the Short of it: A Guide to Finance & Investment for Normally Intelligent People who Aren’t in the Industry.

I already have my next entry price for MLT down on paper, so should MLT breach another level down, I will snap up more of it.  Accumulate on pullbacks … that I will do.

So apart from Mapletree Logistics Trust, what else did I buy when the Singapore stock market declined end October?  

Answer: Ascendas Reit, Singapore’s first and largest listed business space and industrial REIT.  

Once again, I find Vince’s very recent presentation on Ascendas extremely helpful: https://www.reit-tirement.com/2020/10/ascendas-reit-analysis-27-october-2020.html

Key Highlights (the Good)

  1. A diversified portfolio: Well diversified by geography and asset class.
Q3 2020 Report

2. Gross revenue: UP 14.6% YoY to SGD521.2m (1H FY2020). 

3. Net property income: UP 11.1% YoY to SGD388.0m (1H FY2020).

4. Occupancy rate: 91.9%.

5. Interest coverage ratio: 4.3x.

6. Weighted average interest cost: 2.8% per annum.

7. Debt Maturity Profile: Average debt duration of 3.7 years, well-staggered with the longest debt maturing in FY2030.

8. Gearing ratio (and Perpetual Securities): 34.9% as at 30 Sep 2020, DOWN from 35.1% (FY2019) and 36.3% (FY18/19). Ascendas still has an available debt headroom of some SGD4.2b to reach the mandatory 50% aggregate leverage. In FY2019 annual report (ending 31 Dec 2019), Ascendas reported SGD300.868m of perpetual securities.  In September 2020, Ascendas also issued a SGD300m non-call 5 green perpetual securities at 3%.  These perpetual securities are too small in amount to affect the current gearing ratio.

9. Moody’s Credit Rating: Maintained A3 credit rating which testifies to Ascendas’s financial strength and resilience.  In relation to its loans, credit notes, perpetual securities etc, this A3 rating signifies that Ascendas has sufficient financial backing and cash reserves with low risk of default.  

10. WALE: 3.9 years, lease expiry is well-spread, extending beyond FY2034. 

11. Free Cash Flow: UP 15.89% YoY to SGD733.898m (2Q FY2020) from SGD633.241m (2Q FY2019).

12. Net Asset Value per unit: SGD2.17 UP from an average of SGD2.13 in 2019 and an average of SGD2.12 in 2018 (5 years of growth since 2015).

Key Highlights (the Not-so-Good)

1. Distribution per unit: DOWN 10.8% YoY to SGD0.0727 (1H FY2020).  Total distributable income actually increased by 3.7% YoY to SGD263.2m (1H FY2020).  However, owing to an enlarged number of applicable units in issue (+16.3% due to December 2019’s rights issue), the DPU fell.

2. Current yield distribution: 3.97% vs 10-year average yield distribution of 6.15%.

3. Current PB Ratio: 1.50 (Nov 10: 3.19/2.12 ) vs 5-year average of 1.33 (2015-2019).  Definitely overvalued.  I bought Ascendas in 2 tranches: first at SGD3.05, after a dip of 16% from its 52-week high of SGD3.65, and a couple of days later, at SGD2.92, at a 20% drop from its peak price.  At my average price, the PB ratio is 1.41, still overvalued.  And what do I reckon Ascendas’s intrinsic value to be?  Based on different growth numbers for DCF calculations, I estimated the fair value of Ascendas to be between SGD2.45 to SGD2.72.  You can bet on it that I will buy more of Ascendas when the share price comes down closer to what I think its fair value should be.

4. Rental Reversion: -2.3, DOWN from +4.3% in previous quarter.  As a result of the recession, many renewals for lower rental rates were entered into, with the main drag coming from logistics/distribution centres and industrial/data centres in Singapore (rental reversions of -16.2%).  It is expected that in these uncertain times, Ascendas’s tenants are reassessing their operational needs and/or keeping in abeyance their expansion plans out of caution.  18.9% of Ascendas’s total gross rental income comes due for renewal in the expiring days of 2020 and in the next year.  I’ll be paying close attention to this particular metric.

Why did I buy Ascendas?

1. A Consistent Growth Plan in spite of Economic Outlook. Ascendas in its 3rd Q report acknowledges the global uncertainty caused by COVID-19 and outlines the challenges that it will face in Singapore, Australia, UK and the USA going forward.

The Manager remarks: “Generally, there remains uncertainty worldwide due to the resurgence of COVID-19. The economic outlook is expected to be challenging and this could impact the performance of Ascendas Reit. The Manager will continue to work closely with its tenants through these difficult times and keep a close eye on the changing situation so that we will be able to respond accordingly to protect Unitholders’ interests. Ascendas Reit’s well-diversified portfolio and tenant base should help us to mitigate the challenges ahead.”

In spite of the unpredictable economic outlook, Ascendas has found several opportunities to continue to grow its footprint.  Just this year alone, Ascendas has invested/will invest in the following:

1. Acquired a 25% stake in Galaxis (SG)  

2. Completed 4 AEIs, the Capricorn, Plaza 8, The Galen, and a unit at Serangoon North Ave 4, and initiated 2 AEIs at Aperia and a unit at Changi South Avenue 2 (SG) 

3, Acquired an 8-level state-of-the-art suburban Office at Wellington Road (Melbourne, AUS) and completed an AEI at a suburban office unit at Coward Street (Sydney, AUS) 

4. Completed an AEI on a property at Great Western Highway (Sydney, AUS)

5. In process of acquiring 2 properties, a logistics warehouse and a suburban office property (MQX4), in Sydney, AUS.  Many of these suburban office buildings are similar to SG business parks in terms of property attributes. X

6. In process of developing a built-to-suit business park unit for Grab (SG) 

7. In process of redeveloping 2 properties, one being 1Quest@IBP, and the other being a unit at Ubi Road 4 (SG)

8. Just yesterday (Nov 10), Ascendas announced its plan to acquire 2 office properties in San Francisco (already fully leased to payment giant Stripe and Pinterest for a WALE of 9.1 years, and will increase Ascendas Reit’s exposure to the tech, biomedical and digital media industry in the USA from 65% to 75%), a portfolio of data centres in Europe, and a suburban office property in Australia.  Ascendas is raising SGD1.2b through equity fund raising to finance these acquisitions.  Ascendas expects DPU of the proposed US acquisitions and other acquisitions to be accretive on a pro forma basis.

Engaging in AEIs is a vital move for Ascendas to keep its properties “fresh” and appealing, be it refurbishing its existing properties or increasing its gross floor area to maximise rental.  Such AEIs help to provide Ascendas a steady uplift in rental income or provide it additional space for leasing.

It is definitely exciting to see Ascendas expanding further its geographical reach beyond the shores of Singapore.  One cannot help but notice Ascendas’s aggressiveness in adding to its growing stable of properties a number of suburban office units in major cities in Australia.  It has also been deepening its exposure to business parks in 3 cities (Portland, San Diego and Raleigh) in the USA.  These acquisitions are DPU-accretive and help to further diversify Ascendas exposure to logistical and commercial properties in major cities outside Singapore.

Ascendas’s strategy to deepen its presence in the UK, USA and Australia has up to a certain extent insulated it from the current economic downcycle.  Interestingly, these overseas properties have even performed better than those in Singapore.  

Take, for example, the occupancy rate.  Ascendas’s overseas properties have shown better occupancy rates than those in Singapore:

1. UK: 97.5%

2. AUS: 97.5

3. USA: 92%

4. SG: 88.8%

Consider also the rental reversion metric in Q3 (no renewals signed in this period in the UK and AUS).

1. USA: +11.5%

2. SG: -2.8%

Expanding overseas beyond the shores of Singapore is vital to Ascendas’s growth and dominance.  Ascendas’s pipeline of high quality business and science park properties is an attractive prospect, promising appealing acquisition possibilities for Ascendas and spurring its earnings growth in the near future. 

2. Well-diversified Portfolio. Up until March 2018, Ascendas had presence in Singapore (85% of portfolio) and Australia (15%) only.  Thereafter, Ascendas activated its acquisition thrust and found itself venturing into the UK and the USA: Singapore (72% of portfolio), Australia (12%), the USA (10%) and the UK (6%) as at 31 Dec 2019.  

Annual Report FY2019

Ascendas’s huge portfolio comprises 197 properties spread across Singapore, Australia, the UK and the USA.  As such, no one property accounts for more than 4.6% of its revenue.  Ascendas is seeking security from low asset-concentration risk (geographically), as well as low tenant concentration risk (Ascendas enjoys businesses from about 1450 tenants).  The largest tenant Singtel only accounts for about 4% of Ascendas’s monthly gross revenue.  Ascendas has prudently diversified its revenue source and widened its earning base.  In this wise, its overall business won’t suffer too much if, for example, it loses DBS, its 4th largest tenant that contributes only 1.7% of its monthly gross revenue, as a tenant.

Annual Report FY 2019

By not putting all its eggs in one basket, whether geographically or in terms of its tenant composition, Ascendas has reduced many unwanted risks in its business.  Truly, Ascendas’s strength lies in its diversified portfolio and customer base. 

Conclusion

Ascendas is trading at 1.5 PB.  Is it expensive?  Yes, I would say. Judging from its PB, it is trading at a premium.  However, looking at its robust balance sheet, its strong cash position, its revenue stability due to its well-diversified portfolio both in terms of geographical location and tenant make-up, and its track record of DPU and NAV accretive acquisitions and AEIs, I still find Ascendas a worthy investment.  

If the downturn impact of the pandemic remains protracted, there should, hopefully, be some more occasions of pullback on Ascendas’s share price.  As long as I keep buying on dips, I believe my investment in Ascendas will pay off in the long run.  I intend to go long on Ascendas.  It is now the largest constituent in my Forever Portfolio.

It’s nice to have a lot of money, but you know, you don’t want to keep it around forever. I prefer buying things. Otherwise, it’s a little like saving sex for your old age.

Warren Buffett

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Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.