In this article, I will be analysing two of the largest Industrial REITS – Ascendas REIT (AREIT) and Mapletree Industrial Reit.
AREIT did a comparison of all REITS’ Assets under Management (AUM) chart. Looking at the chart, we can see that AREIT is the largest industrial REIT with more than $10 billion AUM while MIT is the third largest industrial REIT with more than $4.4 billion AUM.
Both AREIT and MIT have strong sponsors. Ascendas Singbridge, a joint venture by both Temasek (51%) and JTC (49%), which owns 19% of AREIT, is a leading sustainable urban development and business space solutions provider. On the other hand, Mapletree Investments Pte Ltd is the sponsor for Mapletree REITS. Mapletree Investments was established in 2000 after Port of Singapore Authority (PSA) transferred non-port properties to Temasek.
Both REITS have been growing since its listing. AREIT was listed in 2002 and its DPU grew 5.1% CAGR. Even though MIT is late to the game, it also experienced gain in DPU every financial year. From 8.41c DPU in FY11/12, MIT grew its DPU by close to 40% to 11.75c DPU in FY17/18.
As usual, I will analyse the portfolio, financial health and the industry outlook of both REITs.
AREIT has 171 properties in Singapore, Australia and United Kingdom as of November 2018. Singapore’s properties are categorised into 5 sections – Business and Science Park, Integrated Development Amenities and Retail, Hi-Specs Industrial, Light Industrial and Logistics. Australia’s properties can be categorised into 2 sections – Logistics and Suburban Offices while its latest acquisitions in United Kingdom are logistics.
MIT has about 100 properties including the recent acquisition of 14 US Data Centres (40% interest) in 2018. MIT’S Singapore properties are categorised into 5 sections – Hi-Tech buildings, Business Park buildings, Stack-up/Ramp-up Buildings, Flatted Factories and Light Industrial Buildings.
AREIT occupancy rate in Singapore stands at 87.1% while MIT’s figure is at 87.8%. AREIT occupancy rate in Singapore has been dropping for a year. Occupancy rate fell from 90.1% in Sep 17 to 87.1% in Sep 18. This is so for MIT QOQ too. Occupancy rate for both AREIT and MIT’s overseas expansion is stable. There is nothing much to discuss since it is still quite resilient. However, the focus should be more of the Singapore properties where 78% and 90% of AREIT and MIT properties are in.
AREIT also provided a chart that compares its occupancy rate with the industrial average. However, to my surprise, AREIT occupancy rate is lower than industrial average across the board. Comparing similar categories between AREIT and MIT, we can get insights that AREIT figures are nicer looking than MIT figures. Occupancy rate of 84.4% for AREIT’s Business Science Park is better than the one at MIT’s at 79.6%. However, both REITS have lower occupancy rate than industry average. Occupancy rate of 97.5% for MIT’s Light Industrial Building is better than the one at AREIT’s 87.3% and industry average of 89.3%. It is worthy to note that 1.7% of MIT’s properties are Light Industrial Building so it does not have a huge impact to the quality of properties comparison in terms of occupancy rate. Occupancy rate of 86.7% for AREIT’s Hi-Specs Industrial is better than the one at MIT’s at 84.4%.
Only looking at statistics from FY18/19 to FY21/22, we could see that expiring leases by gross rental income is lower for AREIT across the board. Take for example, 4.4% of leases will expire in FY18/19 for AREIT compared to MIT’s 7.7%. In summary, 57.5% of leases in AREIT will expire by FY21/22 compared to 69% in MIT. If given a choice between AREITT and MIT based on expiring leases, I would choose AREIT. This is because there are fewer leases that are going to expire in the next four years compared to MIT thus making AREIT more stable. In addition, WALE for AREIT’s Singapore portfolio is 4.0 years which is higher than the one at MIT. I am a fan of higher WALE as having higher WALE means that the management does not need to find tenants thus providing stability in rental income. However, the con of having a longer WALE is that if the REIT will miss out any opportunity of rising market rental rates unless there are rental review in the lease.
MIT has over 2000 tenants while AREIT has about 1340 tenants. Even if MIT has more tenants than AREIT, MIT top tenant which is HP is contributing 9.4% of gross rental income. This means that MIT has key tenant risk. On the other hand, AREIT top tenant which is Singtel contributes 4.8% of gross rental income. Due to the high contribution rate at MIT, Top 10 MIT tenants form 25.8% of Portfolio’s Gross Rental Income while the number is just 20.2% for AREIT.
MIT recorded negative weighted average rental reversion of -3.5% across the board in the latest quarter. According to one analyst report, this is the fourth consecutive quarter of negative rent reversion. On the other hand, AREIT recorded a positive 2.3% in the latest quarter. Management expects rental reversion to see slight improvement in FY18/19. A positive rental reversion means that tenants will pay more after rent renewal which in turn leads to organic growth for property income.
In this section, we will take a look at the financial health of the REITs. Debt is very important for REITS and investors as this is one of the few methods that REITS finance to acquire properties. We will look into the Gearing Ratio and Interest Coverage Ratio. Before that, we shall look into the credit ratings of both REITS. MIT is rated by Fitch Ratings to have BBB+ with stable outlook while Moody rated AREIT A3 Positive which is an upgrade from A3 Stable a year ago.
Gearing Ratio of AREIT is at 33.2% while MIT is at 35.1%. A lower gearing ratio will be preferred in this case. Recently, MIT intends to buy another Hi-Tech property at Tai Seng from Mapletree. If the acquisition is funded by debt fully then MIT gearing ratio will jump to about 38.7%.
As for Interest Coverage Ratio, MIT has higher figure at 6.4x while AREIT is at 5.3x. Interest Coverage Ratio means how much times its EBIT can cover the Interest Expense. It also determines how easily a company can pay interest on its outstanding debts. Therefore, a higher Interest Coverage Ratio will be preferred. Both REITS’ Interest Coverage Ratio have become poorer for the past quarters. To add on, both REITS have more than 78% of their debt on fixed rates. AREIT has a higher percentage of fixed rates at about 85% while the figure at MIT is 78%. In this rising interest rate environment, it will be wise to select REITS that have higher percentage of debts on fixed rates. When debts are fixed rate, it means that the management has already hedged its interest rate and REITS will not be affected by any rising interest rate.
JTC publishes Market Report on Industrial Properties every quarter. You can head over to this link to view the report. The report discuss the Price, Occupancy Rate and Future Supply of the industry. It is advisable to look at the report to know more about the industry before investing in AREIT and MIT.
Occupancy Rate for all Industrial Space in the third quarter of 2018 rose 0.4% and 0.5% on a QOQ and YOY basis respectively to 89.1%. Occupancy Rate for all Industrial Space has been dropping since 3Q2011 from about ~93% occupancy rate to as low as 88.6% in 3Q2017 when it has already bottomed. Even if the occupancy rate has bottomed, the chart shown above looks depressing. We shall see how the occupancy rate will be going forward. I think it is commendable for both REITS that despite the declining occupancy rate, both REITS still grow their distribution every year.
Looking at these charts provided by JTC, it seems that the price and rental index computed by JTC have also bottomed out after a 4 years decline.
The Industrial industry in Singapore is getting better going forward. This view is also agreed by RHB Analyst in his report. According to his report, he mentioned that the rental rates are starting to stabilise after declining for a few quarters. Going forward in 2019, he expects the rental rates to pick up thus benefiting Industrial Reits in Singapore. All in all, outlook for industrial segment is turning positive especially for business parks and hi-tech industrial.
To recap, we could see that 67% and 52% of AREIT and MIT properties in Singapore respectively are the two segments that were mentioned by RHB analyst. If his view holds true then we could see more benefits holding AREIT.
Before analysing both REITS, I always felt that both are equally good. However, I feel that AREIT is far more superior that MIT in almost all the categories that I compared. I would still choose AREIT over MIT but there is no harm in buying MIT. If I have spare cash, I would buy MIT too if I want to own as many industrial buildings in Singapore.