ACDSF - CapitaLand Ascendas REIT: Consider Asset Mix And Inorganic Growth Prospects

2023-11-28 09:32:19 ET

Summary

• CapitaLand Ascendas REIT has a diversified portfolio of properties; the REIT's logistics assets have done reasonably well, but its business space properties have underperformed on a relative basis.
• The REIT has the acquisition firepower to execute on M&A transactions, but the deal environment doesn't seem that favorable.
• CapitaLand Ascendas REIT is awarded a Hold rating, following a consideration of its asset mix, M&A growth outlook, and valuations.

Elevator Pitch

I have a Hold investment rating for CapitaLand Ascendas REIT ( ACDSF ) [A17U:SP]. The REIT's inorganic growth outlook is murky taking into account its financial position and the M&A environment. A diversified asset portfolio is a key positive for CapitaLand Ascendas REIT, but the REIT's performance continues to be negatively affected by its exposure to business space properties. Also, I think that the REIT is currently trading at a fair valuation. As such, I have a Neutral view of CapitaLand Ascendas REIT.

CapitaLand Ascendas REIT is listed on both the OTC (Over-The-Counter Market) and the Singapore Exchange or SGX. The three-month mean daily trading values for CapitaLand Ascendas REIT's Singapore-listed and OTC shares were approximately $27 million and $40,000, respectively. Readers can buy and sell CapitaLand Ascendas REIT's more liquid shares traded on SGX with US stockbrokers offering foreign markets trading services like Interactive Brokers.

REIT Profile

On its website , CapitaLand Ascendas REIT refers to itself as "Singapore’s first and largest listed Business Space and Industrial Real Estate Investment Trust" which has "a strong focus on tech and logistics properties in developed markets."

CapitaLand Ascendas REIT's Portfolio Mix By Geography

ACDSF's Asset Mix By Property Type

Still Affected By Weak Economy And Rising Rates Notwithstanding Diversified Portfolio

In the preceding section, I noted that CapitaLand Ascendas REIT's asset portfolio is reasonably diversified by both property type and geography. However, the REIT's recent results and operating performance suggest that difficult economic conditions and higher interest rates still had a negative impact.

As a company with a primary listing in Singapore, CapitaLand Ascendas REIT reports its financial results on a semi-annual basis and provides selected operating updates in the first and third quarters of the year.

The distributable income and DPU (Distribution Per Unit) for CapitaLand Ascendas REIT decreased by -1.7% and -2.6%, respectively in 1H 2023 on a YoY basis as indicated in the REIT's interim results presentation . The weakness associated with business space assets was partially offset by strength relating to logistics properties. As an illustration, rental reversions for CapitaLand Ascendas REIT's Australian business space properties moderated from +18.1% in Q1 2023 to +12.9% for Q2 2023, while its logistic assets' rental reversions improved from +23.6% to +39.1% over the same time period. The REIT's DPU and distributable income for the first half of this year were also hurt by a +55.3% YoY jump in interest expense.

CapitaLand Ascendas REIT didn't disclose revenue, net property income or distributable income numbers for its Q3 2023 business update. But the REIT did reveal that its overall portfolio rental reversions slowed from +18.0% for Q2 2023 to +10.2% in Q3 2023 as per its third quarter business update presentation . It is worth noting that CapitaLand Ascendas REIT's business space and life science assets located in Singapore saw rental reversions slow significantly from +17.9% in Q2 2023 to +6.4% for the most recent quarter. In contrast, the REIT's logistics properties in the UK and European markets registered an impressive +28.8% rental reversion in Q3 2023; there was no comparison available for Q2 2023 as there were no leases renewed for this geographical market segment in that quarter.

In summary, the REIT's 1H 2023 and Q3 2023 results and performance were impacted by its exposure to business space properties, as this asset type is relatively more economically sensitive. But CapitaLand Ascendas REIT 9M 2023 performance would have been even worse, if it didn't have logistics properties which boast more resilient demand in its portfolio.

Inorganic Growth Prospects Are Mixed

Inorganic growth is a key factor that influences CapitaLand Ascendas REIT's future distributable income and DPU. In the first half of 2023, the REIT suffered from a low single digit decline in DPU and distributable income. But CapitaLand Ascendas REIT would have seen a larger drop in its DPU, if not for a solid high single digit growth in net revenue supported by M&A as highlighted below.

CapitaLand Ascendas REIT's Top Line Performance For 1H 2023

I am of the opinion that CapitaLand Ascendas REIT's M&A growth outlook is mixed.

On one hand, the REIT has a pretty strong financial position that can support future acquisitions. As indicated in its Q3 business update presentation, CapitaLand Ascendas REIT's current debt-to-asset ratio is 37.2%, which is way below the statutory leverage limit of 45%-50% (upper limit applicable if certain financial conditions are met) for Singapore REITs. The REIT's interest coverage is a comfortable 4.0 times, and its interest rate volatility risk is limited to some extent by its high fixed debt-to-total debt metric of 80.6%.

CapitaLand Ascendas REIT had previously noted at its most recent interim results call that it has "$1 billion of headroom" before its leverage goes up to 40%, "which is quite good for us to be able to use when the opportunity to arise." This means that the REIT has the acquisition firepower.

On the other hand, it would be prudent to have a realistic view of the actual amount of M&A or inorganic growth transactions that CapitaLand Ascendas REIT will do in the very near term. High interest rates tend to shrink the pipeline of accretive deals that can be done by REITs in general, and CapitaLand Ascendas faces a similarly challenging M&A environment.

CapitaLand Ascendas REIT recently hosted its 2023 Corporate Day on November 24. A November 27 research report (not publicly available) titled "Awaiting The Right Opportunity To Pounce" was published by Singapore research firm DBS Group Research detailing takeaways from the REIT's Corporate Day presentation and commentary. According to this report, CapitaLand Ascendas REIT indicated at the Corporate Day that it will be "very selective (on acquisitions) in this current climate", although it has observed "a compression in pricing expectations between sellers and buyers." As such, it would be fair to assume that the REIT will likely execute on fewer M&A deals in the short term, as compared to what it did during the days of low interest rates.

Final Thoughts

CapitaLand Ascendas REIT is fairly valued based on my analysis which translates into a Hold rating. The REIT offers a consensus forward next twelve months' dividend or distribution yield of 5.55%, which is slightly higher than its five-year average yield of 5.49%. The REIT is valued by the market at 1.22 times P/B, and that is slightly lower than its five-year mean P/B ratio of 1.31 times. These numbers are taken from S&P Capital IQ .

Separately, the REIT's inorganic growth outlook is mixed. While diversification limits the downside for CapitaLand Ascendas, the REIT isn't completely unaffected by macroeconomic weakness and interest rates. These factors also support a Hold rating for CapitaLand Ascendas REIT.

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