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

___________________

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.