Ascendas REIT’s shares fell earlier this week, after it announced raising SGD1.2 billion worth of new shares. The cash will be used to buy two US properties in San Francisco, data centres in Europe and an office property in suburban Australia.
Here’s where the money’s going:
SGD390 million — two freehold offices in US, San Francisco, occupied by Stripe and Pinterest.
SGD614 million — data centres in Europe.
SGD180 million — a suburban office building in Australia.
Remaining goes to transaction fees.
The big banks, investment and insurance companies will invest in the deal through a private placement.
While retail investors through a “preferential offering”.
As you know, Singapore REITs is still one of the best places to grow your dividends for retirement.
But before we go deeper into the details, let me quickly explain what a “preferential offering” means.
What About Ascendas REIT’s Preferential Offering?
A preferential offering is like a “rights” issue. Which means you’ve instant privilege of buying new shares at a discounted price.
But unlike a rights issue, you cannot sell this privilege to another investor.
This is important here.
The 37 new units’ price is lower than the current share price, because Ascendas wants to attract unitholders to subscribe to the new shares. So it can quickly complete its acquisition.
If you’d owned 1,000 units of Ascendas REIT today, you’d have the privilege to buy another 37 units — at S$2.96 per new unit.
And Ascendas is prepared to raise 133.9 million of these preferential offerings to its retail unitholders.
Why is Ascendas REIT Buying So Many Properties?
Now, I’m writing this because I think there’s something interesting going on here.
You see, this is Ascendas’ second share raising. The previous one was last year when it did a major rights issue.
If you’ve noticed lately, Ascendas is transforming its “property mix”.
Let me explain.
Ascendas is traditionally Singapore’s largest industrial REIT.
But in recent years, it shifted its focus into “business & science parks” — these properties are leased to tenants in the technology, financial, and biomedical fields. If you think about it, these fields are at the forefront of innovation.
And, sometimes, it’s good to know what the big landlords like Ascendas are truly thinking.
You see, as of Sep 2020, 40% of its properties are already coming from business & science parks.
Some of its big tenants even include DBS Bank, Singapore’s DSO National Laboratories, J.P. Morgan Chase Bank to name a few.
And they’ve been very large, profitable tenants. It makes Ascendas a very well-diversified landlord.
Source: Company Presentation
You know, Ascendas has a track record of accumulating high-quality properties.
In fact, its 200 properties come from the most developed cities worldwide — the US, UK, Australia and Singapore.
With its strong sponsor, CapitaLand Ltd, Ascendas gets to buy all the good properties from its mother company.
As a result, Ascendas quickly grew its free cash flow (FCF) from SGD35 million in FY2004 to a massive SGD550 million during its latest fiscal year of March 2020. Its gross rental income jumped 13x SGD886 million over the same period.
If you’d held onto Ascendas since its IPO in 2002, you’d make around 500% (as at Dec 2020) returns on your capital. And that includes all the dividends you’d collected from the start.
By far, in my opinion, this is the third best performing Singapore REIT.
Is Ascendas REIT’s Acquisition The Right Choice?
That’s why, you see, Ascendas latest acquisitions are all focused on the innovators and disrupters today.
Its two San Francisco properties are fully occupied by Stripe and Pinterest. Each is one of the largest internet companies in their respective fields.
Now, Ascendas is a smart investor.
It knows the San Francisco properties are well-located in a highly demanded area for technology tenants.
If these tenants decide to leave, Ascendas shouldn’t have an issue finding another big tech tenant to replace.
And both properties have leases close to 10 years. With each lease a built-in, 3% rent increment year after year. It’s what makes these properties’ rental safe and predictable.
Management hasn’t disclosed details of other European data centres and single Australia suburban offices. But it mentioned both acquisitions are “DPU accretive”.
DPU is distribution per unit. It’s what you get if Ascendas paid out its earnings to unitholders.
So, “DPU accretive” means you’d get an additional 0.129 cents of distribution per unit from the new properties’ rental income. And that’s if you’d subscribe to the new preferential offering.
Source: Company’s Presentation
Ascendas’ annualized DPU last year was 15 cents per unit. That’s a yield of around 5% based on today’s share price.
Here’s something more interesting about Ascendas.
Management is saying both its US properties’ rental are still “under-rented” by 5% to 25%. Which means unitholders can enjoy a much higher property yield in the future.
And that’s going to add to the DPU.
As far as I’m concerned, besides all the “new technology stuff”, the biggest risk for Ascendas comes from its existing food and events-related tenants. These tenants were affected by the pandemic crisis.
And Ascendas had to drop its rents to retain these SME tenants.
Ascenda’s latest financial results have held up well.
Is Raising New Shares Good for Ascendas REIT?
You see, the SGD1.2 billion worth of new shares is only part of the funding story. Ascendas had decided to finance the whole purchase of new properties with 50% new shares and 50% debt.
Here’s something important, in my opinion, about high-quality REITs today.
In the long run, it’s not a lack of tenants which landlords like Ascenda face. But it’s during a crisis like the pandemic where landlords could face a cash crunch — if they aren’t careful with their financing.
Remember, REITs pay out almost all of their rental income as dividends, right? There’s often little cash in their pockets.
So raising new shares prevents Ascendas from getting into trouble. Why? Because they don’t have to incur too much debt and interest to their lenders during the tough times.
And it makes the REIT safer this way. Even better, it gives Ascendas more room to take on debt next time to buy other, high quality properties.
Anyway, Ascendas has a very strong balance sheet. Its leverage is healthy at 35%, far from MAS’ gearing limit of 50%. And Ascendas’ operating profits could easily cover interest by 4.3x.
Because of its strong sponsor, CapitaLand, Ascendas continues to enjoy very low borrowing rates.
Should You Buy into the New Preferential Offering?
The recent price drop makes it interesting to look at Ascendas today. And since Ascendas’ latest acquisitions have the potential to grow its rental income, perhaps it’s worth looking into the new preferential offering.
Of course, with a current price/book valuation of around 1.4x, you’d have to pay a slightly higher premium for its overall properties’ growth potential.
If you’re an income investor looking to grow your wealth in retirement, it might be worth taking this preferential offering a second look.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
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