• Maintain BUY with a revised TP of SGD3.15 from SGD3.60, 20% upside and c.6% yield. CapitaLand Ascendas REIT’s (CLAS) healthy operational numbers in 3Q met expectations. Occupancy and rents continue to trend in the right direction with the outlook remaining positive. Its relatively healthy gearing also puts it in a good position to do selective deals like the two quality assets in Singapore which it acquired during the quarter. High debt hedge (78%) and the implementation of higher service charges mitigate interest rate and utility impact.

• Operational strength continues with portfolio occupancy increasing 0.5ppt QoQ to 94.5% (+2.8ppt YoY) on the back of occupancy improvements for its assets in Australia and the UK/Europe, driven by increased demand for logistic assets. Portfolio rent reversion (3Q) came at 5.4% (2Q: 13.2%) with all markets and all asset classes seeing positive rent reversion. Its US portfolio was the star performer with logistics leases renewed during the quarter that saw a 60% rent growth and business space assets rent increasing 11% indicating its right positioning and continued market demand. In Singapore logistics assets saw a +15% rent reversion reinforcing our views of multi-year rerating for the logistics sector. CLAS also implemented higher service charges for its Singapore leases from Oct 2022 to mitigate rising utility charges and inflationary cost pressures.

• Adding its Singapore portfolio mix. During the quarter, the REIT acquired a cold storage logistic asset at 1 Buroh Lane, with a 7% net property income (NPI) yield and high tech campus Philipps APAC Centre (7.2% yield) taking its total acquisitions for the year to SGD520m. Singapore accounts for 61% of total assets followed by the US (15%), Australia (14%), and UK/Europe (10%). Management had earlier guided for SGD1.0bn acquisition target pa but we expect it to come below that level for the year. It has also commenced redevelopment at one of its US assets to convert it from an office space to a life sciences building, at an estimated capex outlay of USD40m with an NPI yield post conversion at c.9.0%.

• Fixed rate debt accounts for 78% of total with every 50bps increase in interest rate impacting DPU by 1.1%. It has c.SGD1.3bn or c.20% of its debt due for refinancing up until 2023. FX: It has a relatively high level of natural hedge at 75% on the back of high proportion of debt taken in local currency.

• We adjust lower our FY23F-24F DPU by 2% mainly by adjusting our interest cost assumptions. We also raise out COE assumptions by 70bps factoring in sharp interest rate hikes resulting in a lower TP. CLAS has the highest ESG score of 3.3 out of 4.0, among REITs (based on our proprietary methodology). As this score is three notches above our country median, we applied a 6% premium to our intrinsic value to derive our TP.

Source: RHB Research - 1 Nov 2022