CapitaLand Ascendas REIT: A shelter from the SREIT storm

·       We recently ran stress tests on the top 10 S-REITs by market capitalisation. It revealed CapitaLand Ascendas REIT (CLAR) as the most resilient shelter amidst the current interest rate environment.

·       With continued demand and limited supply, we expect positive rental reversions for CLAR’s logistics properties, underpinned by its quality and strategic locations.

·       Supported by a robust sponsor, CLAR is well-positioned to obtain loans at much more favourable rates, facilitating future acquisitions. It has also demonstrated financial discipline, with a lower leverage ratio compared to its large-cap peers.

·       As of 3Q2023, its overall portfolio occupancy rate was at 94.5%, higher than its 10-year average of 90.6%.

·       Our 2025 target price for CLAR is SGD 3.14, derived from a dividend discount model with a terminal growth rate of 2% and a cost of equity of 7%. This implies a 11.09% upside, alongside an average forward dividend yield of 5.36%.

In today's rapidly evolving market, the significance of warehousing and logistics properties has surged to the forefront of the commercial real estate landscape, primarily driven by the explosive growth of e-commerce. With the online shopping revolution showing no signs of slowing down, the demand for efficient storage and distribution centres has reached unprecedented levels.

However, Singapore REITs (S-REITs) have faced significant challenges as rates remain elevated. Tenant defaults, increasing refinancing risks, and declining property values have heightened concerns, especially as S-REITs are subjected to a regulatory leverage threshold of 50%.

Related Article: Be selective on S-REITs as rates stay higher for longer

Amidst this challenging landscape, one S-REIT has emerged as the most resilient shelter in our stress test, making it a standout choice for investors seeking both stability in the S-REITs sector and growth in the evolving e-commerce market. In this article, we initiate coverage on CapitaLand Ascendas REIT (SGX:A17U) (CLAR) and highlight the attributes that underscore its position as a dividend stock deserving of investors’ consideration.

The star performer in our stress test

The current elevated interest rate environment would have implications on property values, subsequently influencing leverage ratios. In our stress test, we estimate that a 100 basis points cap rate expansion would lead to a roughly 15% decline in CLAR's property value. Despite this, there is still a sizable buffer of 14% before approaching the regulatory leverage limit of 50%. CLAR’s estimated buffer is higher relative to its large-cap peers namely Mapletree Industrial Trust (MINT) and Mapletree Logistics Trust (MLT), which are estimated to have a buffer of 10% and 5% respectively (Figure 1).

Figure 1: Cap rate expansion

We also examined another critical aspect: the near-term refinancing risk. After factoring in the cost of debt after refinancing debts maturing between 2023-2025, we estimate CLAR’s cost of debt to increase from 3.3% to 3.9%, growing by 18%. This is a smaller percentage increase relative to its large-cap peers (Figure 2). Consequently, CLAR’s estimated interest coverage rate (ICR) is projected to decrease from 4.0X in 3Q2023 to 3.3X, but remain above the minimum ICR requirement of 2.5X to leverage up to 50%.

Considering both cap rate expansion and refinancing risks, we believe CLAR enjoys a healthy margin of safety.

Figure 2: Change in cost of debt after adjusting for near-term refinancing risks

Supply chain tailwinds fuelling rental reversions

In 3Q2023, CLAR's diverse portfolio is comprised of (i) Business Space accounting for 39% of the portfolio by asset value, (ii) Logistics (25%), (iii) Industrial (19%), (iv) Life Sciences (8%), and (v) Data Centres (9%).

Geographically, the portfolio strategically focuses on developed markets, with a significant presence in (i) Singapore constituting 62% of the portfolio by asset value, (ii) Australia (13%), (iii) the US (15%), and (iv) the UK and Europe (10%).

The weighted average lease expiry (WALE) of 3.7 years for its portfolio in Singapore suggests that the majority of leases would be expiring in the near term, and could position CLAR to exercise its bargaining power to drive rental reversion.

In the last two quarters, CLAR’s rental reversions were largely attributed to stronger demand for its logistics properties. Exceptional in its logistics assets located in Singapore, rental reversion increased by 25.5% and 39.1% in 3Q2023 and 2Q2023 respectively. This resulted in an overall portfolio rental reversion of 10.2% and 18.0% in 3Q2023 and 2Q2023 respectively.

66.5% of CLAR’s tenant profile is in booming industries which include logistics and supply chain management and e-commerce. Looking at the top three business industries for its tenant mix, logistics & supply chain management emerged second, just behind data centres (Table 1).

Table 1: CLAR’s top three business industries in its tenant mix

Rank	Tenant industry	%
1	Data centres	12.6
2	Logistics & Supply Chain Management	12.5
3	Engineering	11.1
Source: CapitaLand Ascendas REIT. Data as of 30 Sep 2023.

Market rentals across all types of industrial properties have been on an upward momentum and we believe that it will persist over the next two years. Notably, the upcoming supply of logistics properties coming online in 2024 and 2025 (Table 2) would constitute approximately 5% of the existing supply in terms of gross floor area.

Table 2: Upcoming projects in Singapore’s logistics space

Expected Completion	Proposed Project	Developer	Location	GFA (sqm)	% Pre-committed (Estimated)
2023	Fairprice Group Fresh Food Distribution Centre	NTUC Fairprice Co-operative Ltd	Sunview Road	59,680	100%
2024	POKKA Logistics BTS Redevelopment	ESR SG Real Estate Pte Ltd	Benoi Crescent	64,490	62%
2024	LOGOS eCommerce Hub (Phase 2)	Pandan Crescent Pte Ltd	Pandan Crescent	81,050	77%
2024	36 Tuas Road	Boustead Projects Ltd	Tuas Road	59,790	0%
2025	Warehouse Development	Allied Sunview Pte Ltd	Sunview Road	116,810	70%
2025	Redevelopment of 51 Benoi Road	Mapletree Logistics Trust	Benoi Road	82,390	65%
			Total	464,210	64%
Source: JTC. Data as of 30 Jun 2023. Note: Only projects with GFA above 50,000 sqm are included in the table.

However, we expect this new supply to have only a marginal impact on rental rates due to the sustained high demand driven by the diversification of supply chains and the proliferation of e-commerce. This huge demand for logistics properties has translated into steeper growth in the rental index for warehouses (2.3% qoq / 8.3% yoy) (Figure 3).

Figure 3: Rental Index of Industrial Properties

We believe strong demand and limited supply would further drive rental reversions for CLAR’s logistics properties, particularly given their quality and locations. This is especially true as tenants look to secure prime locations for distribution – thereby, optimising its supply chain management.

At the start of the year, the management provided guidance for overall portfolio rental reversion to be mid-single digit in FY2023. It was a conservative estimate as throughout the first three quarters of the year, the REIT achieved strong double-digit rental reversions of 11.1%, 18.0% and 10.2% respectively – largely attributed to its logistics assets. With the outperformance, the management has adjusted its expected rental reversion for FY2023 to be in the high-single digit during its 3Q2023 update.

Relative to its large-cap peers, CLAR has consistently delivered the strongest quarterly rental reversions since 2021 (Figure 4). Moreover, as of 3Q2023, CLAR’s occupancy rate for its logistics assets, 99.2%, was well above JTC’s industrial average, 91.3%, with a significant differential of close to 8%. CLAR’s occupancy rate was also above its large-cap peers with MINT and MLT which stood at 93.2% and 96.9% respectively.

With strong rental reversions and occupancy rates, these are testaments to CLAR’s continual robust portfolio quality and performance. Considering the higher base established in 2023, we project modest rental reversions for CLAR in the low single digits for both FY2024 and FY2025.

Figure 4: Quarterly Rental Reversion

Backed by a strong sponsor

CLAR is backed by a strong sponsor, CapitaLand, which provides it with a large pipeline of logistics, industrial and business park assets for acquisition. Also, this formidable support positions it well to secure loans at more favourable rates, ultimately paving the way for future acquisitions that can potentially enhance its value.

New acquisitions serve as a crucial growth driver for REITs. In 9M2023, CLAR acquired a few properties, divested one, and completed an asset enhancement initiative (Table 3). It has also announced another acquisition slated for completion in 4Q2023 - a new 9-storey office building in Sydney, Australia, named MQX4.

Table 3: Completed acquisitions and divestment

Completed Acquisition	Sub-segment	Purchase Consideration (SGD m)	Completion Date
622 Toa Payoh Lorong 1	Industrial and Data Centres	104.8	11 Jan 2023
1 Buroh Lane	Logistics	191.9	2 Feb 2023
The Shugart	Business Space and Life Sciences	218.2	25 May 2023
Data Centre in Watford	Industrial and Data Centres	209.4	17 Aug 2023
	Total	724.3
Completed Asset Enhancement Initiative	Sub-segment	Cost (SGD m)	Completion Date
The Alpha	Business Space and Life Sciences	15.5	28 Sep 2023
Completed Divestment	Sub-segment	Purchase Consideration (SGD m)	Completion Date
KA Place	Industrial and Data Centres	35.4 (purchased at 11.1 in 2005, 219% premium)	24 May 2023
Source: CapitaLand Ascendas REIT. Data as of 30 Sep 2023.

Another key strength of having a strong sponsor is that it would impose financial discipline, resulting in a conservative approach adopted by CLAR for its capital management. As a result, CLAR maintains a conservative gearing ratio of 37.2%, which is below the large-cap peers’ average of 38.4%. This prudent financial management approach not only positions CLAR well within the MAS’s gearing limit of 50%, but also provides the flexibility needed to capitalise on strategic opportunities and navigate diverse market conditions in the future.

Figure 5: CLAR’s gearing and its corresponding regulatory gearing limits

Table 4: Gearing across large-cap peers

Company	Gearing as of 3Q2023 (%)
CLAR SP	37.2%
MLT SP	38.9%
MINT SP	37.9%
MEAN	38.4%
Note: Both MLT & MINT have a different fiscal year which ends on 31-Mar from CLAR which ends on 31-Dec and has been adjusted accordingly for comparison. Source: iFAST Compilation. Data as of 30 Sep 2023.

Risks:

Falling demand for office spaces in the US

Given the recent economic challenges in the commercial real estate market in the US, demand and valuation among US business space assets have declined.  This risk is mitigated as a small percentage, 12.7%, of CLAR’s portfolio is made up of US business space assets. Furthermore, CLAR’s overall portfolio occupancy rate stands at 94.5% in 3Q2023 which is higher than its 10-year average of 90.6%. Hence, this further illustrates its portfolio resiliency.

Valuation:

We used a dividend discount model (DDM) to value CLAR, as the REIT has been paying out regular dividends. Our estimates have factored in contributions from new acquisitions, rental reversions, and increased refinancing costs in the near term, alongside a dividend payout ratio of 97% (equivalent to its recent payout ratios).

Based on a cost of equity of 7% and a terminal growth rate of 2%, our 2025 target price for CLAR is SGD 3.14, illustrating a 11.09% upside potential relative to its share price as of 1 December 2023. We are also expecting an average forward dividend yield of 5.36%.

In short, investors who wish to invest in S-REITs should consider CapitaLand Ascendas REIT (SGX: A17U). We believe CLAR is worth highlighting due to (i) its sufficient buffer against declines in property value, (ii) rising rental reversions in its Singapore portfolio and (iii) its strong sponsor.

Table 5: DPU Growth

	2022	2023E	2024E	2025E
DPU (SGD cents)	15.80	15.11	15.13	15.25
DPU Growth (%)	3.5	-4.3	0.1	0.7
Yield (%)	5.8	5.3	5.4	5.4
Source: iFAST Estimates Data as of 1 Dec 2023

Figure 6: Share Price and Distribution per Unit

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.