• 3Q23 update reflects solid positive rental reversions and stable capital management metrics 
• Key positives: i) double digit positive rental reversions YTD in 2023, ii) slight uptick in portfolio occupancies driven by healthy take-up in Singapore, iii) all-in borrowing costs maintained at 3.3%
• What we are watching out for: i) borrowing costs expected to creep up with refinancing in the coming quarters, ii) how portfolio valuations shape up in December 2023, though we expect minimal impact from cap rate expansions
• Maintain BUY with TP of S$3.40

What has happened?

Capitaland Ascendas REIT (CLAR) has released its business update for 3Q23, highlighting continued resilience in operational performance. The portfolio's occupancy rate saw a slight increase of 0.1 ppt., reaching 94.5%. This uptick was primarily due to higher occupancies in the Singapore portfolio, although there was a marginal dip in occupancies in Australia and UK/Europe. Notably, this quarter marked the third consecutive quarter with double digit positive rental reversions at an impressive rate of +10.2%. Lease renewals in Singapore, the US, and the UK/Europe all reported positive rental reversions. In particular, the logistics segments in Singapore and the UK/Europe continued to demonstrate robust double-digit positive reversions of +25.5% and +28.8%, respectively.

Regarding capital management, CLAR's gearing increased by 50 bps. q-o-q, reaching 37.2%. We believe this increase was primarily attributed to the acquisition of a data centre in Watford, UK. The acquisition, completed in mid-August 2023 for S$209.4m, was partly funded by funds (c.62%) raised earlier in May 2023 and new debt (c.38%). During the quarter, CLAR’s average all-in borrowing cost remained at 3.3%. Looking ahead, only S$272m in borrowings remains due for refinancing for the rest of the year.

Our views.

CLAR continues to maintain strong operating metrics thanks to its highly diversified portfolio. During the quarter, a significant portion of leases was renewed, substantially reducing lease expiries for FY23 by approximately 5.2 ppt., with only c.1.7% of leases set to expire in 4Q23. It's worth noting that new leases signed in 3Q23 had an average term of 4.7 years. In Singapore, demand from businesses in the Biomedical and Agri/Aquaculture, and Distributors and Trading Companies sectors continued to dominate, while the Engineering and Logistics and Supply Chain Management sectors were the primary sources of new demand overseas. CLAR has guided for high single-digit positive rental reversions for FY23, but it appears they are on track to deliver double-digit positive rental reversions for the year, as demonstrated in the first three quarters.

While gearing increased in 3Q23, CLAR's balance sheet remains robust, with 80.6% of loans hedged at fixed rates. All-in borrowing cost remains stable at 3.3% in 3Q23 and we anticipate that CLAR's all-in borrowing costs will likely inch up as loans due in 4Q23 are refinanced, but we expect it to stay well within management’s earlier guidance of an average of 3.5%. Despite expectations of higher financing costs, we believe that the c.S$900m in acquisitions and AEIs/developments completed so far in the year will help mitigate the impact on earnings. The S$209m acquisition of the UK data centre is expected to generate a highly attractive NPI yield of approximately 9.4%, while the completion of MQX4 in Australia on October 17, 2023, is projected to yield around 6.1%.

We are confident that CLAR is on track to deliver a forward yield of approximately 6.1% in FY23, given its resilient operating performance and healthy gearing of around 37%. This positioning should enable its portfolio to weather any potential asset cap rate expansions in December 2023. Therefore, we maintain our BUY recommendation with a TP of S$3.40 based on a forward yield of c.6.1% currently, and a DPU CAGR of c.2.0% over the next 3 years.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate[1] does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests[2]  in relation to an issuer or a new listing applicant that the analyst reviews.  DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports.  The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.  There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS"), DBSVUSA, or their subsidiaries and/or other affiliates have a proprietary position in Capitaland Ascendas REIT recommended in this report as of 30 Sep 2023.
2. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, or their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Capitaland Ascendas REIT recommended in this report as of 30 Sep 2023.

Compensation for investment banking services:

3. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Capitaland Ascendas REIT as of 30 Sep 2023.
4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Capitaland Ascendas REIT in the past 12 months, as of 30 Sep 2023.
5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced:

6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed on page 1 of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

[1] An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 

[2] Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis.  This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.