• Maintain BUY with a revised TP of SGD3.20 from SGD3.25, 14% upside and c.6% yield. 1H results for CapitaLand Ascendas REIT were in line. Operational metrics came in slightly better than expected - with very strong double digit rent reversions and stable occupancy - and are expected to remain strong for the rest of the year. The effect though should be offset by higher interest and utility cost increases. CLAR remains on track to complete an earlier announced acquisition in Europe and will focus on extracting value through asset enhancement initiatives (AEIs).

• 1H DPU down 2% YoY; expecting a flattish 2H with higher revenue and net property income (NPI) contributions from organic rental growth as well as contributions from recent acquisitions. 1H NPI rose 6.7% YoY but was offset by a 50% rise in interest costs and a slightly larger unit base resulting in lower DPU. YTD, average interest costs rose 80bps to 3.3% and the cost is expected to rise marginally higher in 2H as c.13% of its debts get refinanced later this year. Approximately 82% of its debt is currently fixed which mitigates the rising rates as every 50bps rise results in c.1% DPU impact. Based on an internal valuation, there were no significant changes in the overall value of its portfolio, with a slight uptick in Singapore and the UK, offsetting a slight weakness in the US.

• Rental growth to continue after posting one of the strongest quarterly reversion (2Q) of 18% in recent years with all markets registering double digit rent reversions. Singapore market was the star performer (19.5%) with the logistics segment positing a solid 39.1% rent reversion on the back of continued demand and market rent increases over the last three years. We expect rent reversions to remain in positive high single digits for the rest of the year despite some signs of softening seen in business parks and the general industrial segment. Its US portfolio saw a slight occupancy decrease on the back of tenant downsizing. Such weakness is expected to persist through next year as leases expire; overall rents remain below market, offsetting some of the weakness. Occupancy for Singapore, the UK. and Australia are expected to be maintained at current high levels.

• Potential acquisition in Europe - announced earlier as part of equity fund raising - is nearing completion and is expected to be completed in coming months. The acquisition will be in a key gateway city, in an existing asset class of logistics/data centres, of c.SGD200m in value, with initial NPI yields of c.7%. CLAR also announced redevelopment of 5 Toh Guan Road East asset to a modern ramp up warehouse facility with a c.71% higher GFA and greener specifications. The estimated cost of AEI is SGD 107.4m with ROI in the 6-7% range,

• We fine-tune our FY23F-24F DPU -1% and -3% by adjusting higher our interest cost assumptions. CLAR has an ESG score of 3.4 (out of 4.0); we applied an 8% ESG premium to our DDM derived TP.

Source: RHB Research - 1 Aug 2023