• CapitaLand Ascendas REIT (CLAS)’s 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 to CapitaLand Ascendas REIT's DPU.

CapitaLand Ascendas REIT's 3Q22 Highlights

• Operational strength continues with CapitaLand Ascendas REIT (SGX:A17U)'s portfolio occupancy increasing 0.5ppt q-o-q to 94.5% (+2.8ppt y-o-y) 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 (3Q22) came at 5.4% (2Q22: 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.
• CapitaLand Ascendas REIT also implemented higher service charges for its Singapore leases from Oct 2022 to mitigate rising utility charges and inflationary cost pressures.
• Fixed rate debt accounts for 78% of CapitaLand Ascendas REIT's total debt with every 50bps increase in interest rate impacting CapitaLand Ascendas REIT's DPU by 1.1%.
• CapitaLand Ascendas REIT has ~S$1.3bn or ~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.

Adding Its Singapore Portfolio Mix

• During the quarter, CapitaLand Ascendas 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 S$520m.
• Singapore accounts for 61% of CapitaLand Ascendas REIT's total assets followed by the US (15%), Australia (14%), and UK/Europe (10%).
• Management had earlier guided for S$1.0bn 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 US$40m with an NPI yield post conversion at ~9.0%.

CapitaLand Ascendas REIT – Valuation & Recommendation

• We adjust lower our FY23F-24F DPU forecast for CapitaLand Ascendas REIT 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 target price.
• CapitaLand Ascendas REIT 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 target price.
• Maintain BUY recommendation on CapitaLand Ascendas REIT with a revised target price of S$3.15 from S$3.60, 20% upside and ~6% yield.

Source: RHB Invest Research - 1 Nov 2022