I am deeply troubled by the recent announcement (released on 18 March 2021) by Ascendas REIT with regard to the acquisition of 11 European data centres at a cost of S$960Mil. Make no mistake, the venture into acquiring more data centres here is definitely good news for Ascendas REIT and also something that I have always been looking forward. For clarity here, I am referring to the non-user friendly disclosure by both Ascendas REIT as well as SGX which leaves me feeling extremely frustrated as an investor.
1. Confusing financials and distribution yield
Being an investor, the confusing part sets in when I try to do a quick forecast of the new distribution yield. The SGX dividend page for REITs is a real nightmare because it only depicts dividends and does not account for capital distribution. Now, capital distribution for most REITs is actually not a one-off payout item and for most part, are actually recurring and sustainable- please see my write-up for Manulife US REIT (basically, these are actually a form of tax planning for most cases to minimise withholding tax).
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| Extracted from SGX Ascendas "Dividends" |
You will end up with only a distribution yield of 3.5% which is totally wrong as the capital component should also be included. I have sent out an email to SGX Customer Service to state that for REITs, the essence is actually total distribution to unit-holders and not just "dividends" in view that a number of REITs are using capital return in their setup structure to remit earnings back to Singapore unit-holders in order to minimize withholding tax leakage. However, SGX simply just brushed this off as saying this is already present in the announcement and investors should go manually extract out themselves- they will not be publishing a one page summary tab for this set of information.
The frustration is not solely from SGX. You will see that brokerage firm such as Maybank Kim Eng and their platforms are also misleading when it comes to sharing distribution yield information for REITs. You will end up with a distorted view similar to the above. The only consolation is that StocksCafe seems to be accurate in its current yield projection feature. Anyway, enough of my ranting. For the projected new distribution yield for Ascendas REIT, please see below:
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| Self computation of distribution yield before and after |
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| Took some mental acrobatics to read and interpret Ascendas REIT's release and was wondering whether the 0.189cents is it increment or referring to total distributions. |
The disappointing thing here is that the distribution yield only improves by a mere 1.3% post acquisition from 4.82% to 4.88% assuming a closing price of S$3.050. This is actually only a tiny amount despite the deployment of S$612.5Mil of the proceeds from the rights issue on 9 Dec 2020 (remaining S$347.5Mil will be funded by debt) which was previously unproductive capital. Saying that, if we normalise for one-off COVID rental rebates granted to tenants, I reckon that the overall distribution yield will approach 5% which is excellent for a REIT with such a well diversified portfolio as well as having a strong sponsor in Ascendas which is a member of Capitaland.
2. Target Price for Ascendas REIT
Well, I can only say that this is quite a circus. Analysts prediction range from S$3.30 per unit to S$4.00 per unit- kind of ridiculous projection akin to guess work in my personal opinion. This is mostly irrelevant to me as my approach is still mainly a dividend focused strategy and I intend to hold Ascendas REIT for the long term, so long as there is no major deterioration in its business fundamentals.
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| Newly acquired Data Centre in Amsterdam- The Netherlands |
Parting Thoughts
The acquisition of the data centres barely make an impact to Ascenda REIT due to the colossal size of the overall properties under its portfolio. However, this is definitely a right step forward and I hope that Ascendas REIT will keep adding on data centres such that it holds at least 30% of its portfolio in this resilient business.
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