Post-1HFY2023 results, analysts trim DPU forecasts on CapitaLand Ascendas REIT on high funding costs

1HFY2023 income available for distributions fell 1% y-o-y to $327.5 million, impacted by higher interest costs.

CapitaLand Ascendas REIT (CLAR) A17U boasts “solid” reversions, but its high funding costs are a drag, say CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong.

While Lock and Ong maintain “add” on CLAR in an Aug 1 report, the CGS-CIMB analysts have a relatively conservative target price of $3.06, unchanged from their previous note.

On July 31, CLAR reported revenue of $718.1 million for 1HFY2023 ended June, up 7.7% y-o-y, while net property income (NPI) increased 6.7% y-o-y to $508.8 million, due to contributions from new acquisitions made in FY2022 and 1HFY2023.

However, income available for distributions fell 1% y-o-y to $327.5 million, impacted by higher interest costs.

CLAR’s 1HFY23 distribution per unit (DPU) of 7.72 cents was 2% lower y-o-y.

Portfolio occupancy stood at 94.4% at end-1HFY2023, with the decline in US occupancy offset by higher take-up in Australia.

Meanwhile, portfolio rental reversion was healthy at 18% and 14.2% in 2QFY2023 and 1HFY2023, note Lock and Ong.

Singapore logistics and life sciences spaces were its best performing segments, with reversions of 39.1% and 17.9% respectively.

CLAR has 6.9% and 16.4% of portfolio leases expiring in 2H2023 and FY2024 respectively, mainly from business spaces in Singapore, the US and Australia. With its strong 1HFY2023 performance, CLAR raised its guidance for FY2023 rental reversion to be in the “positive high single-digit range”.

In addition, gearing declined to 36.7% as at June 30 from 38.2% on March 31, following equity fundraising of $500 million in May.

In terms of outlook, CLAR said on July 31 that it has turned more cautious owing to the more challenging near-term macro environment which may impact its tenants’ businesses and its operating costs.

Lock and Ong retain their DPU estimates of 16 cents for FY2023 and FY2024. “We continue to like CLAR for its diversified and resilient portfolio and healthy balance sheet. Potential catalysts include faster-than-expected global recovery and accretive new acquisitions. Downside risks include a protracted economic downturn that could adversely impact its ability to price rents for positive reversions, and inability to tap acquisition growth opportunities due to the high interest rate environment.”

‘Steady and stable’

Meanwhile, RHB Bank Singapore analyst Vijay Natarajan stays “buy” but with a lower target price of $3.20 from $3.25 previously. The target price includes an 8% ESG premium, based on RHB’s proprietary methodology.

In an Aug 1 note, Natarajan similarly points to higher interest cost assumptions.

Year-to-date, average interest costs rose 80 basis points (bps) to 3.3% and the cost is expected to rise marginally higher in 2HFY2023 as some 13% of its debts get refinanced later this year.

Approximately 82% of CLAR’s debt is currently fixed, which mitigates the rising rates as every 50 bps rise results in 1% DPU impact. “Based on an internal valuation, there were no significant changes in the overall value of its portfolio, with a slight uptick in Singapore and the UK, offsetting a slight weakness in the US,” says Natarajan.

Adjusting for higher interest cost assumptions, Natarajan “fine-tunes” his FY2023 and FY2024 DPU down 1% and 3% to 16 cents for both years.

Redevelopment in progress

DBS Group Research analysts Dale Lai and Derek Tan have the highest target price on CLAR among houses here, at $3.40.

Lai and Tan justify their “buy” call with news that a potential acquisition in Europe is nearing completion. The acquisition will be in a key gateway city, in an existing asset class of logistics and data centres, of $200 million in value and with initial NPI yields of 7%.

CLAR also announced the redevelopment of 5 Toh Guan Road East asset to a modern ramp-up warehouse facility with a 71% higher gross floor area (GFA) and greener specifications. The estimated cost of the asset enhancement initiative (AEI) is $107.4 million with return on investment in the 6%-7% range.

In addition, CapitaLand announced on June 26 a $1.37 billion life sciences and innovation cluster named Geneo. The project’s largest property is 1 Science Park Drive, set to open in 2025.

1 Science Park Drive comprises three Grade-A office buildings linked by an event plaza, offering some 112,600 sq m of work space and 3,600 sq m for retail. It is a 66:34 joint venture between the unlisted CapitaLand Development and CLAR.

Due to the timing difference between the May fundraising, and the acquisition in Europe followed by the redevelopment, Lai and Tan have revised downwards their DPU forecast by  0.6% over the next two years to 14.8 cents.

“However, once the redevelopment of 5 Toh Guan Road East and 1 Science Park Drive are completed in FY2025, we expect CLAR to report DPU CAGR of 2.6% from FY2025 onwards. In our projections, we have also accounted for 80 bps increase in borrowing costs over the next two years. As such, a better-than-anticipated acquisition yield in Europe, or a slower-than-anticipated increase in financing costs will lead to upside to our revised estimates,” write Lai and Tan.

In 1HFY2023, CLAR completed three accretive acquisitions here with an aggregate purchase consideration of $514.9 million. The acquisitions were a high-tech industrial property at 622 Toa Payoh Lorong 1 ($104.8 million), a cold storage facility at 1 Buroh Lane ($191.9 million) and The Shugart, a business park property at 26 Ayer Rajah Crescent ($218.2 million).

In April, CLAR divested KA Place, a high-specification industrial building in Singapore, for $35.4 million, a 55% premium to its market valuation.

The REIT’s portfolio of 230 investment properties was worth $17.0 billion as at June 30. This comprised $10.7 billion (63%) of properties in Singapore, $2.5 billion (14%) in the US, $2.3 billion (14%) in Australia and $1.5 billion (9%) in the UK and Europe.

According to the manager, same-store valuation, excluding the three acquisitions, was stable at $16.4 billion.

As at 10.11am, units in CapitaLand Ascendas REIT are trading 2 cents lower, or 0.71% down, at $2.80.

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