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.

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.  

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.

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.