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Elevator Pitch
CapitaLand Ascendas REIT (OTCPK:ACDSF) [A17U:SP] is rated as a Hold.
My earlier November 28, 2023 update touched on the divergence in the performance of CapitaLand Ascendas REIT’s different assets and the REIT’s inorganic growth strategy. In this latest write-up, I draw attention to ACDSF’s Q1 2024 business update, and the REIT’s response to shareholders’ questions in relation to this year’s Annual General Meeting or AGM.
I continue to have a mixed view of CapitaLand Ascendas REIT following an assessment of the REIT’s latest disclosures. The REIT’s recent quarterly operational update and its replies to investors’ queries have both positive and negative read-throughs. Therefore, I have chosen to retain a Hold rating for the REIT.
The REIT can be traded on the SGX (Singapore Exchange) and the OTC (Over-The-Counter) market. CapitaLand Ascendas REIT’s OTC shares boasted an average daily trading value of $0.04 million (source: S&P Capital IQ) for the past three months. In comparison, the three-month average daily trading value for the REIT’s Singapore-listed shares was much higher at $25 million as per S&P Capital IQ data. Interactive Brokers is one of the US brokerages which allow their clients to buy or sell CapitaLand Ascendas REIT’s Singapore-listed shares that have better trading liquidity.
First Quarter Business Update
Given that CapitaLand Ascendas REIT is listed in Singapore, it only reports its full financial results twice every year. However, the REIT does provide updates on its operations for the first and third quarters of the year.
CapitaLand Ascendas REIT published its Q1 2024 business update presentation slides on April 22. There are both positive and negative takeaways from the REIT’s latest quarterly performance.
On one hand, the REIT’s portfolio occupancy rate decreased on both a sequential and YoY (Year-on-Year) basis in Q1 2024.
The portfolio occupancy rate for CapitaLand Ascendas REIT declined from 94.4% as of March 31, 2023 and 94.2% at the end of 2023 to 93.3% as of end-Q1 2024. This implies that the REIT’s portfolio occupancy contracted by -110 basis points YoY and -90 basis points QoQ (Quarter-on-Quarter) for the latest quarter.
In particular, the REIT’s assets in the Australia and the UK/Europe markets saw their portfolio occupancy rates decrease by -210 basis points and -180 basis points, respectively in Q1 2024 on a sequential basis. In its first quarter business update presentation, CapitaLand Ascendas REIT explained that the performance of its Australian properties was negatively affected by a “lease expiry of a single tenant at 16 Kangaroo Avenue, a logistics property (Sydney).” The decline in the occupancy rate of the REIT’s UK/Europe assets was attributable to “a single-tenant lease expiry of a data center at Welwyn Garden” as per ACDSF’s disclosures in its Q1 business update.
It is reasonable to be concerned that specific leases have expired and new tenants for these properties haven’t been secured by the end of the first quarter.
On the other hand, CapitaLand Ascendas REIT registered a reasonably good portfolio rental reversion for the leases it renewed in the most recent quarter.
The REIT recorded a robust +16.9% portfolio rental reversion rate for Q1 2024, which was even better than the +15.2% portfolio rental reversion achieved in Q4 2023.
Specifically, CapitaLand Ascendas REIT’s Singapore logistics properties and US logistics assets delivered portfolio rental reversion rates of +62.0% and +28.7%, respectively for the first quarter of this year. Looking forward, the REIT maintained its existing full-year FY 2024 portfolio rental reversion guidance at the “mid-single digit” percentage level.
It is encouraging to know that the REIT has managed to renew its recent expiring leases at higher rental rates.
To sum things up, the REIT’s most recent Q1 2024 results were mixed, taking into account both lower occupancy and strong portfolio rental reversion.
Response To Shareholders’ Questions
ACDSF’s Annual General Meeting or AGM is held on April 26, 2024. Prior to the AGM, CapitaLand Ascendas REIT issued an announcement on April 22 addressing questions that were previously raised by investors.
The REIT’s response to shareholders’ questions have favorable and unfavorable read-throughs.
On the positive side of things, CapitaLand Ascendas REIT remains on the lookout for potential M&A deals that might boost its future performance.
In the April 22, 2024 announcement, the REIT emphasized that “we continue to source for investment opportunities to deepen CLAR’s (CapitaLand Ascendas REIT’s) presence” in its existing markets prioritizing “DPU (Distribution Per Unit)-accretive acquisitions.”
Notably, CapitaLand Ascendas REIT disclosed in its Q1 2024 update presentation slides that it has an investment grade “A3 credit rating” and a “healthy” financial leverage ratio of 38.4%. In other words, the REIT has the financial strength to provide support for its inorganic growth plans.
On the negative side of things, the valuations of certain properties owned by the REIT have declined at the end of last year. There is also a specific asset in Singapore which is unleased and still seeking tenants for a prolonged period of time.
A shareholder asked about the “11 data centers in the UK/Europe” bought in March 2021 which are currently valued at -17% below the initial purchase consideration. In response, CapitaLand Ascendas REIT attributed this decline in valuation for these acquired data center assets to “rise in capitalization rates, which are closely correlated to benchmark rates.” Considering the current “higher-for-longer” interest rate expectations, there is a risk of a further contraction in the valuation of the REIT’s properties.
Also, the REIT noted that a “two-story high-specifications building” located at “30 Tampines Industrial Ave 3” in Singapore has been without a tenant for more than a year. Capital Ascendas REIT highlighted in its April 22, 2024 announcement that “the pool of potential tenants is limited” for this particular asset due to the “specialized building specifications and location in a zone for semiconductor usage only.”
In summary, it is positive that the REIT is still seeking potential inorganic growth opportunities and has the financial strength to pursue such deals. On the flip side, negatives for the REIT include the unfavorable impact of elevated interest rates and certain assets which might be tough to lease out as a result of specific circumstances.
Closing Thoughts
ACDSF’s recent disclosures don’t offer compelling reasons to be either very bullish or extremely bearish on the REIT. Therefore, a Hold rating for CapitaLand Ascendas REIT is fair.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
