Capitaland Ascendas REIT: Redevelopment underway, accretive acquisition to follow

Dale LAI1 Aug 2023
  • 1H23 DPU of 7.719 Scts in line with our projections
  • Announced the redevelopment of 5 Toh Guan Road East with a ROI c.6%-7%; acquisition in Europe to follow
  • Near-term correction in DPU due to timing difference between fund raising and deployment; DPU CAGR of more than 2.6% from FY25 onwards
  • Maintain BUY, S$3.40 TP
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1H23 revenues and NPI driven by recent acquisitions in Singapore

  • 1H23 revenues of S$718.1m was 4.7% higher h-o-h
    • Mainly due to acquisition of 622 Toa Payoh Lorong 1 and 1 Buroh Lane
      • Completed on 11 January and 2 February 2023
    • Also included slightly more than 1 month of income contribution from The Shugart
      • Seagate’s R&D facility in One-North
      • Acquisition completed on 25 May 2023
    • 1H23 NPI of S$508.8m was 3.5% higher h-o-h
      • Increase in NPI was partially offset by higher operating expenses (i.e. higher utility costs)
      • Utility costs expected to drop in the coming quarters as electricity tariffs peaked in FY22, and have since gradually declined

 1H23 DPU of 7.719 Scts was in line with our projections

  • 1H23 DPU was 2.6% lower h-o-h, and 2.0% lower y-o-y
    • In line with our earlier projections, making up 50% of our earlier DPU estimates for FY23
  • Despite the additional income contribution from recent acquisitions, DPU was lower y-o-y and h-o-h
    • Higher NPI was partially offset by higher borrowing costs and the enlarged unit base from private placement of 183.4m units on 17 May 2023
  • Of the S$500m in funds raised, c.60% of the proceeds have been utilised
    • S$139.5m utilised for the acquisition of The Shugart (purchase consideration of S$218.2m)
    • S$160.4m utilised for debt repayment
    • S$5.4m utilised to pay the fees and expenses incurred in connection with the private placement
    • S$194.3m balance from the private placement
      • S$129.9m to partially fund an acquisition in Europe
      • S$64.4m to partially finance the redevelopment of 5 Toh Guan Road East

 Redevelopment of 5 Toh Guan Road East

  • Property is an existing cargo lift warehouse
    • Redeveloped into a six-storey ramp up logistics property
  • GFA will be increased by c.71% (21.179 sqm)
    • Enlarged GFA of 50.920 sqm
  • Total estimated cost of S$107.4m
    • S$64.4m to be funded by proceeds from private placement in May 2023
  • Redevelopment will commence in 4Q23 and complete in 4Q25
  • Remaining land tenure of 26 years
  • Estimated ROI of between 6%-7%
ROI will be in the higher range if CLAR is able to convert some of the space into cold storage facilities that typically generate higher yields.

Stellar rental reversions of +18.0% and stable occupancy rate

  • Strong positive rental reversions of +18.0% in 2Q23
    • This follows the positive rental reversion of +11.1% in 1Q23
    • Average rental reversion was +14.2% in 1H23; rental reversions in FY23 expected to be in the high-single digit range
  • 2Q23 positive rental reversions across all markets
    • Singapore: +19.5%, mainly driven by Logistics, and Business Space and Life Sciences
    • US: +11.0%, mainly driven by Logistics
    • Australia: +12.9%, from Business Space
  • Portfolio occupancy flat at 94.4% q-o-q
    • Higher occupancies in Australia was offset by a 40bps dip in occupancy in the US (92.1% in 2Q23)
    • Occupancy rate in Singapore and the UK remained stable
  • Only 6.9% of leases (by GRI) to be renewed in 2H23
    • Bulk of expiries coming from Singapore and Australia
  • New demand in 2Q23 from the logistics, IT/Data Centre, Financial and Professional Services, and Engineering sectors
    • Singapore: despite concerns of downsizing and relocation of tenants from the business parks segment, CLAR is still seeing new demand and expansion demand from tenants in the financial services sector
    • US: San Diego remains strong; Portland still seeing some volatility: Raleigh has some expiries coming up and demand has been weak due to downsizing from the IT sector, but the worst is likely over 

Healthy gearing of only 36.7%

  • 1H23 gearing of 36.7% was a 150bps improvement q-o-q
    • Mainly due to the equity fund raising in May 2023
  • All-in borrowing costs remained stable at 3.3% in 2Q23
  • S$668m of loans remains to be refinanced in FY23
    • Refinancing due in September and December 2023
    • Based on current rates, interest rates on loans to be refinanced could be doubled (ie. from slightly above 2.0%up to c.5.0%)
    • However, this only represents less than 10% of total loan book; impact to overall cost of debt would only be c.20-30bps
    • All-in cost of debt by the end of the year could potentially increase to c.3.5%
  • Increase in all-in financing costs could lead to a c.2%-3% downside to DPUs
    • We have already accounted for the higher financing costs in our projections

Our thoughts

We have adjusted our projections to account for the equity fund raising in May 2023, followed by the subsequent acquisitions of The Shugart, redevelopment of 5 Toh Guan Road East, and assumed an acquisition in Europe. We have assumed an acquisition of c.S$250m in Europe at an estimated yield of 6.5% in 4Q23. An earlier than expected acquisition of a higher yield will lead to upside to our revised estimates. 

Due to the timing difference between the fund raising, and the acquisition in Europe (assumed completion in 4Q23) followed by the redevelopment, our FY23 DPU has been revised down by c.0.6% over the next two years. However, once the redevelopment of 5 Toh Guan Road East and 1 Science Park Drive are completed in FY25, we expect CLAR to report DPU CAGR of c.2.6% from FY25 onwards. In our projections, we have also accounted for c.80bps increase in borrowing costs over the next two years. As such, as better-than-anticipated acquisition yield in Europe, or a slower-than-anticipated increase in financing costs will lead to upside to our revised estimates.

We have rolled forward our DCF valuation and maintain our BUY recommendation with an unchanged TP of S$3.40.

FY Dec

1H2022

2H2022

1H2023

% chg   yoy

% chg hoh

 

 

 

 

 

 

Gross revenue

667

686

718

7.7

4.7

Property expenses

(190)

(194)

(209)

10.4

7.7

Net Property  Income

477

492

509

6.7

3.5

Other Operating expenses

(51.0)

(49.8)

(51.8)

1.6

3.8

Other Non Opg (Exp)/Inc

89.4

0.99

43.5

(51.4)

nm

Associates & JV Inc

0.16

0.19

0.18

8.0

(5.9)

Net Interest (Exp)/Inc

(80.0)

(108)

(120)

(50.4)

(11.6)

Exceptional Gain/(Loss)

0.0

73.8

0.0

-

-

Net Income

436

409

380

(12.7)

(7.0)

Tax

(31.8)

(52.6)

(19.8)

(37.6)

(62.3)

Minority Interest

0.0

0.0

0.0

-

-

Net Income  after Tax

404

357

361

(10.7)

1.1

Total Return

404

357

361

(10.7)

1.1

Non-tax deductible  Items

(73.1)

(23.4)

(45.0)

(38.4)

92.2

Net Inc available for Dist.

331

333

316

(4.6)

(5.3)

Ratio (%)

 

 

 

 

 

Net Prop Inc Margin

71.6

71.7

70.9

 

 

Dist. Payout Ratio

100.0

100.0

100.0

 

 

Source of all data: Company, DBS Bank

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