In its latest business update, Ascendas REIT (SGX: A17U) reported that an increase in the supply of industrial spaces in Singapore might put downward pressure on rental rates.
The REIT has already taken steps to mitigate that risk by announcing more overseas acquisitions that reduce its portfolio exposure in Singapore.
It announced a massive equity fund-raising to the tune of S$1.2 billion which will be spent on a string of properties in the US, Europe and Australia.
Unitholders will be excited to hear that Ascendas REIT has already completed the acquisitions of two office properties in San Francisco.
Ascendas REIT has purchased two freehold office buildings in South of Market (SoMa), San Francisco for a combined S$768 million. They are located at 510 Townsend Street and 505 Brannan Street.
The acquisitions will see the REIT’s portfolio asset value expand by 6% to S$13.7 billion.
The properties are fully leased to payments technology company Stripe, as well as image sharing service Pinterest Inc (NYSE: PINS).
Both properties are LEED® Platinum-certified Class A, the highest rating based on the efficiency of the design and operation of the building.
Enhance portfolio resilience
With a lengthy weighted average lease expiry (WALE) of 9.1 years, these acquisitions promise to strengthen the foundation of the REIT’s portfolio, lengthening overall WALE by 0.2 years to 4.1 years.
Another bonus from the acquisition is the fact that the properties are leased out on a triple-net basis with built-in rent escalation of 2-3% annually.
And if that’s not attractive enough, the buildings are also built on freehold land, meaning that freehold properties now form 34.2% of the REIT’s portfolio, up from 30.2% previously.
Prior to these acquisitions, Ascendas REIT had already possessed arguably the most diversified portfolio of any Singapore REIT, with its largest tenant contributing just 4.1% of monthly gross revenue.
But with the additions of Stripe and Pinterest to the REIT’s top ten tenants by revenue, no single tenant will form more than 3.9% of the REIT’s revenue base.
It also reduces the REIT’s Singapore asset exposure from 70% to 66%, with the United States now contributing 15% of the portfolio asset base.
SoMa is also a highly attractive technology hub in San Francisco, with established companies like Adobe (NASDAQ: ADBE) and PayPal Holdings (NASDAQ: PYPL) having offices there.
A legislative referral that limits city office development in San Francisco was also passed in March 2020, which will limit the supply of new office spaces in the city.
The new restrictions will tilt the balance of supply and demand positively towards the REIT.
The properties at Townsend Street and Brannan Street are expected to produce a net property income yield of 4.8% for the first year.
Income investors will also rejoice as the acquisitions are accretive to the REIT’s distribution per unit (DPU).
Based on pro-forma estimates, DPU should rise by S$0.00129, or 0.85%.
More acquisitions ahead
Of the S$768 million outlay for the San Francisco acquisitions, S$390 million will be paid for by the hefty S$1.2 billion raised from the equity fundraising, with the remainder funded by debt.
This means that Ascendas REIT still has S$810 million in the coffers for further acquisitions.
The REIT shared that it is looking to spend the money on a portfolio of data centre assets in Europe, as well as a suburban office property in Australia.
Data centres have been in hot demand as companies rapidly digitize and global data traffic increases.
Meanwhile, the Australian target follows the REIT’s acquisition of a suburban office in Macquarie Park, Sydney.
Ascendas REIT has always boasted a well-diversified portfolio, although its heavy portfolio weightage to Singaporean assets could constitute geographical concentration risk.
These potential additions will add further geographical diversification to the REIT’s portfolio and are likely to be DPU accretive as well.
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Disclosure: Herman Ng does not own shares in any of the companies mentioned.