In recent years, Singapore Exchange Limited (SGX: S68), or SGX, has struggled to attract IPOs, especially from exciting technology companies that are booming despite the COVID-19 pandemic.
Hence, it is no surprise that the Straits Times Index (SGX: ^STI), which contains the 30 biggest listed companies in Singapore, is down around 24% year to date.
More than half of the index weightage is from bank and real estate stocks, which have experienced a dismal 2020 thus far.
Ascendas REIT (SGX: A17U) is the largest real estate investment trust (REIT) listed on the SGX, and forms 4.1% of the STI.
The industrial REIT is trading at S$2.93 per unit as of this Monday, down about 20% from its 52-week high of S$3.65.
As the REIT is one of the larger components of the STI, investors will be watching its performance closely over the next few months.
Ascendas REIT recently published a business update for the quarter ended 30 September 2020, and here are five key points to note.
Slight increase in occupancy
Ascendas REIT reported a portfolio occupancy of 91.9% on 30 September 2020, inching up from 91.5% on 30 June 2020.
Notably, it is also an improvement compared to the occupancy rate of 91.0% from a year ago.
Even though Ascendas REIT reported that nine tenants had to pre-terminate their leases, those tenants only formed less than 0.05% of the REIT’s total net lettable area (NLA) as of 30 June 2020.
These figures once again show the resilience of industrial REITs like Ascendas, who have not been as badly hit by the pandemic as REIT sub-sectors such as retail REITs.
Negative rental reversions
Ascendas REIT also reported negative rental reversions of 2.3% for the current quarter.
Lower rental rates were agreed for most of the renewals in the REIT’s Singapore properties, with the largest hit coming from logistics & distribution assets which saw rental reversions of -16.2%.
On a more positive note, the REIT’s United States assets saw positive rent reversions of 11.5% for the quarter, continuing the trend from the previous quarter where higher rental rates of 16.2% were agreed upon.
With 18.9% of the REIT’s total gross rental income (GRI) due for renewal in the rest of 2020 and 2021, investors will be keenly watching the rental reversion numbers.
At 34.9% gearing, Ascendas REIT is operating with a healthy capital structure.
The REIT’s latest acquisition of a suburban office in Sydney, Australia was funded by 40% debt and 60% equity. The slight tilt to equity in the funding helped the REIT reduce its gearing from 36.1% in the previous quarter.
The reduced gearing is a sign that the REIT is taking a more conservative approach given the uncertain economic conditions ahead.
Its current gearing leaves Ascendas REIT with a debt headroom of S$4.2 billion before it hits the gearing limit of 50% set by MAS.
This higher headroom provides the REIT with the flexibility to issue more debt to conduct more DPU-accretive acquisitions should opportunities arise.
Weak market outlook
In its business update, Ascendas REIT warned that demand for industrial space is expected to remain lacklustre.
The pandemic has already forced many companies to put off expansion plans or even downsize, but the worst may still be yet to come.
In the past week, France and Germany have announced new emergency lockdown measures in response to spiking cases of COVID-19 infections.
The US, Japan and Russia are also some major economies that are setting new highs for daily infections.
It is not a given that Singapore, Australia and the UK, where Ascendas REIT owns properties in, will not face further waves of infection that could wreak more havoc upon the economy.
In addition, industrial supply in Singapore is expected to grow by 8.8% in the next four years, which will put further downward pressure on rental rates.
Coupled with lacklustre demand, this increased supply is a potential risk factor for Ascendas REIT as 70.5% of its GRI in Singapore is due for renewal in the next three years.
Strength in diversity
While the REIT acknowledges the global uncertainty caused by COVID-19, it owns a well-diversified portfolio that should help it meet the challenges ahead.
The REIT has a wide array of 1,450 tenants with the largest, Singapore Telecommunications Limited (SGX: Z74), accounting for just 4.1% of GRI.
More impressively, no single property contributes more than 4.5% of the REIT’s GRI.
This level of diversification is only possible because of the sheer size of Ascendas REIT.
But the pandemic continues to create challenges for the REIT.
If the virus outbreak continues to create economic chaos going into 2021, even diversification may not shield Ascendas REIT from financial stress moving forward.
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Disclosure: Herman Ng does not own shares in any of the companies mentioned.