• Keep BUY and SGD3.20 TP (19% upside), c.6% yield. CapitaLand Ascendas REIT’s 1H DPU was in line. Portfolio occupancy dipped slightly QoQ, offset by still-healthy double-digit rent reversions. Management raised its FY24 rent growth expectations to a high-single-digit level, which we believe is still conservative, while occupancy is expected to be relatively flattish. Near-term focus is likely to be on asset enhancements with acquisitions and divestments being more opportunistic. Financing costs are likely nearing its peak as majority of its debt remains well hedged.

• Portfolio rent reversion (2Q) of 11.7% (1H: 13.4%), with all markets registering growth and the key driver being the Singapore logistics sector. CLAR noted that while logistics sector demand remains positive, rent growth is likely to taper to mid-single digits in coming years as the market rent gap has narrowed. Portfolio occupancy stood at 93.1% (-0.2ppts QoQ), with the decline mainly from the US (87.7%, -1.8ppts QoQ) due to the exit of tenants at two single-tenant properties (a logistics asset in Kansas City and a business space in Portland). Overall it expects full-year occupancy to be at 93-94%.

• Changi Business Park assets have hit inflection point. The assets (c.6% of overall NPI) which have been under pressure in recent years from tenant exits/downsizing, have reached an inflection point, according to management. ONE@Changi City, which is undergoing enhancements, will welcome Singapore Airlines as a new tenant in 2Q25. CLAR also noted that authorities are now more receptive to the idea of change of usage for some of its assets in the area.

• Discussions ongoing for Welwyn Garden City, UK, involving a data centre (DC) asset which CLAR is looking at redeveloping with a significant increase in power capacity (c.60MW). It is currently in discussion with the authorities. With the new UK government planning to boost DC infrastructure, we see good potential to generate higher returns from the asset.

• 1H DPU fell 2.5% YoY, up 1.1% HoH. YoY decline was due to an enlarged unit base while distributable income rose HoH on the back of contribution from new assets/redevelopments and lower operating expenses. NPI margins for 2H are expected to be similar and slightly better in FY25F from lower utility costs. Financing costs rose c.20bps in 1H24 to 3.7% and are expected to be maintained at the same level for the full year, as c.83% of its debt is hedged.

• Maintain estimates. CLAR has one of the highest ESG scores among S-REITS, given its consistent green initiatives. As the score is three notches above the country median, we applied a 6% ESG premium to our DDM derived TP.

Source: RHB Research - 31 Jul 2024