• Keep BUY and SGD3.20 TP, 26% upside and 6% yield. CapitaLand Ascendas REIT’s business update (1Q) showed continued strong momentum in rent growth offset by slightly higher vacancies. During the quarter, the REIT completed the divestment of three Australian assets and more of such divestments are likely this year. Near-term focus should be on asset redevelopment while acquisition pace could be slower amid recent interest rate volatility and rising interest cost pressure. Key catalysts are early rate cuts and continued strong rent growth.

• Positive rent reversion (1Q) of 16.9% (4Q: 15.2%, FY23: 13.4%) indicating continued strong demand for industrial assets. Singapore portfolio remains a key growth driver, registering a healthy double-digit (+16%) rent reversion during the quarter led by the logistics segment which saw a stellar 62% increase in renewal rates highlighting the strong market rent growth over the last few years. Management maintained its guidance for a mid-single digit rent reversion; however, we see room for an upside surprise to potentially low double-digit levels from positive demand supply dynamics and tenant receptiveness amid a high inflationary environment.

• Slight dip in portfolio occupancy to 92.3% (-0.9 ppt QoQ) mainly came from the expiry of a single tenant in its Sydney logistics asset and lower occupancy at a logistics property in the US. Considering the positive demand-supply dynamics for the logistics sector, we expect the spaces to be backfilled in the coming quarters. Meanwhile occupancy at its UK portfolio declined due to the single-tenant lease expiry at the Welwyn Garden City data centre. Management is currently evaluating redevelopment plans for this asset, with the potential to significantly increase power capacity that can attract larger tenants but it could also involve significant upfront capex.

• Gearing stands modest at 38.3% (FY23: 37.9%) and we believe acquisitions, if any, in the near-term are likely to be more opportunistic and bite-sized (SGD50-200m range). Interest cost rose +30bps QoQ to 3.8%, which we believe is partially due to an increase in the hedging of the loans with 83% of the debt being fixed (up from 79% as and end 4Q23) with an average term of 3.5 years.

• No changes to our estimates. CLAR has one of the highest ESG scores among S-REITS at 3.4 (out of 4.0) on back of its consistent green initiatives. As the score is three notches above the country median, we apply an 6% ESG premium to our DDM derived TP.

Source: RHB Research - 23 Apr 2024