In 2022, a year where caution was the parent of safety, CapitaLand Ascendas REIT (CLAR) dialled down on its growth strategy against a background of accelerating rate hikes in 2H2022, and focused on keeping its portfolio occupied, at 94.5% as at Sept 30, 2022, and its balance sheet robust.
On Nov 15, 2022, Moody’s Investors Service reaffirmed its A3 rating for CLAR. Despite CLAR’s “acquisitive growth strategy [which is] funded with a mix of divestments, debt and equity”, Moody’s points out that the positioning of CLAR’s portfolio enables the trust to capture growth in the technology, logistics and life sciences industries.
Moody’s also reiterates that CLAR’s track record and income generation remain stable; the REIT has a “diversified portfolio of good-quality industrial assets across Singapore, Australia, Europe, the UK and the US; established market position as one of the largest industrial landlords in Singapore by asset size; and disciplined financial policies”.
As a case in point, CLAR’s acquisitions in 2022 were modest. It acquired a cold storage facility at 1 Buroh Lane for $191.9 million announced on Sept 14; Philips APAC Centre in Singapore for $104.8 million announced on Aug 4; and seven logistics properties in Chicago for the equivalent of $133.2 million announced on May 10.
As at 1HFY2022, in terms of assets, CLAR has 40% of its assets overseas. This diversifies risk in terms of currencies, markets and also asset classes, despite the focus on tech and logistics. CLAR has owned the so-called new economy assets in its portfolio since its inception in 2002. Logistics, data centres and life science properties (new economy), as well as business parks and industrial buildings, have been part of CLAR’s IPO portfolio.
CLAR focuses on all mature markets in terms of geography, and technology and logistics in terms of sector. “Each country we invest in has themes around tech and logistics. We have always been in the new economy from day one. We were in knowledge-based business parks, R&D. [By assets], we have 80% in new economy, and the other 20% is industrial and manufacturing,” William Tay, CEO of CLAR’s manager, said in an October 2022 interview.
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Globally, 64.3% of CLAR’s customer base is from the technology, logistics and life sciences industries.
On Dec 30, 2022, Manulife US REIT announced it is likely to record a 10.9% decline in the real estate valuation of its portfolio to US$1.95 billion ($2.6 billion) for FY2022 compared to US$2.62 billion as at end-2021. Is this likely to impact CLAR’s US portfolio? CLAR’s aggregate leverage stood at 37.3% and interest coverage ratio at 5.5x, giving it a lot more room for manoeuvre.
Analysts have indicated that all REITs are likely to be affected by current levels of interest rates as they are a lot higher than year-ago levels. In a December report, JP Morgan says “DPU declines over the next two years are likely due to the impact of the Fed funds rate hitting 4.85%, Sofr (secured overnight financing rate) reaching 5% and Sora (Singapore overnight rate average) at 4.5% by March 2023, and being held until rate cuts commencing in 2Q2024.”
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Even then, JP Morgan says “CLAR, CapitaLand Integrated Commercial Trust, Keppel DC REIT and the hospitality trusts are likely to be the most resilient, owing to prior acquisitions and completion of developments/AEIs (asset enhancement initiatives), as well as continued travel recovery, translating into stable or increasing DPU”.
Despite its bite-sized acquisitions, CLAR is also undertaking AEIs that should add to DPU. An acquisition under development, MQX4 in Macquarie Park, will be completed in 2Q2023. In the US, CLAR is converting a campus property to a life science property in San Diego, to be completed in 4Q2023; the reconfiguration of iQuest@IBP will be completed in 4Q2024; the redevelopment of Science Park will be completed in 4Q2025; and the AEI at The Alpha will be completed in 4Q2023. These should support DPU as and when the properties come onstream.
“CLAR should offer flattish DPU growth owing to a high proportion of fixed-rate debt, inbuilt rental escalations and recent acquisitions,” JP Morgan says.
