• Stay BUY and SGD 3.25 TP, 13% upside and 6% yield. CapitaLand Ascendas REIT’s proposed acquisition of Seagate’s R&D facility is positive – we like the asset’s modern specifications, location, and long lease term. It is also in the process of finalising another acquisition in Europe and redevelopment of a logistics facility in Singapore. These transactions will be partially funded by equity placement and is marginally accretive. Overall, we believe the transaction reinforces CLAR’s dominant positioning in the business space and life sciences sectors, and the one-north cluster.

• The acquisition of The Shugart (Seagate’s Singapore headquarters) for SGD218m is a c.5% discount to latest valuation. The 8-year-old modern specification asset located in the prime one-north cluster is mainly used for R&D purposes and has a balance 20-year lease. Initial NPI yield is an attractive 8.3% (post-transaction cost: 7.8%), ie slightly higher than recent transactions and indicating a slight softening in pricing expectations in our view amid the rising interest rate hurdles. Additionally, The Shugart comes with a long 10-year master lease (with an option to extend another 10 years) and a built-in annual escalation of 2.5%. Post transaction, business parks will account for c.49% of CLAR’s portfolio with prime one-north cluster assets representing 13% of total assets under management or AUM. This acquisition is slated for completion by 2Q23.

• CLAR is evaluating a potential European acquisition that is located in one of the continent’s key gateway cities and will be in its existing asset class of logistics/data centres. It is currently in an advanced due diligence stage and we expect the asset value to be in the range of c.SGD200m with an initial NPI yield of slightly >7%. In addition, the REIT also announced its plan to redevelop its existing cargo-lift logistics asset in Singapore into a modern ramp-up warehouse facility by maximising the asset’s plot ratio. The estimated yield on cost for the redevelopment is c.7.5-8.5%.

• Equity placement to raise a minimum of SGD450m with the proceeds to be used to fund the above transactions and debt repayments. While the equity fundraising in the current challenging market may act as a slight overhang on CLAR’s share price, we believe it helps in better positioning its balance sheet well with an overall lower gearing of 37.6%. The REIT is also actively looking at divestments to recycle and optimise its capital.

• High ESG score 3.4 among S-REITs. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details. As CLAR’s ESG score is four notches above country median score, we have applied an 8% ESG premium. We fine-tune our FY23-25F DPU by -2% to 1%, factoring in placement and timing delays from income contributions.

Source: RHB Research - 17 May 2023