So they decided to rename themselves to CapitaLand Ascendas Real Estate Investment Trust (“CLAR”). Guess they want to make sure the whole world knew that Ascendas REIT was under CapitaLand. The abbreviation CLAR does not really go well with me as it sounds like some candy. Suggestions are welcome.
On 31 October 2022, they have announced their third quarter business update. Ever since SGX removed the quarterly reporting requirement, CLAR will only provide business updates for Q1 and Q3. Noticeably, there is a lack of financial data as the REIT only focus on portfolio updates.
Website: General Announcement::Business Updates For The Third Quarter Ended 30 September 2022
CLAR is Singapore’s first and largest listed business space and industrial real estate investment trust. As one of Singapore’s REIT pioneers, CLAR has played a crucial role in the development of the Singapore REIT sector, providing an attractive platform for investment in business park and industrial properties in Singapore.
CLAR’s multi-asset portfolio is anchored by well-located quality properties in Singapore, Australia, the United States, and the United Kingdom/Europe. These properties house international and local companies from a wide range of industries and activities, including data centres, information technology, engineering, logistics & supply chain management, biomedical sciences, financial services (back room office support), electronics, government and other manufacturing and services industries.
Investment properties stood at SGD16.5 billion as at 30 September 2022.
CLAR is listed on several indices. These include the FTSE Straits Times Index, the Morgan Stanley Capital International, Inc (“MSCI”) Index, the European Public Real Estate Association/National Association of Real Estate Investment Trusts (“EPRA/NAREIT”) Global Real Estate Index and Global Property Research (“GPR”) Asia 250. CLAR has an issuer rating of “A3” by Moody’s Investor Services.
CLAR is managed by CapitaLand Ascendas REIT Management Limited, a wholly owned subsidiary of Singapore-listed CapitaLand Investment Limited, a leading global real estate investment manager with a strong Asian foothold.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 31 October 2022, DPU was not included in the business update for the third quarter of 2022.
Occupancy
Occupancy rate as at 30 September 2022 stands at 94.5% which is an improvement from 94.0% as at 30 June 2022. Although this was an improvement from prior quarter occupancy rate, it is below my expected healthy occupancy rate of 95% and CLAR have been unable to fully utilize their assets. However, with the occupancy rate have been continuously improving. This metric is thus Neutral.
Gearing ratio
Gearing ratio stands at 37.3% as at 30 September 2022 as compared to 36.7% as at 30 June 2022. This to me is considered Favorable as it means there is sufficient headroom from the MAS limit of 50% to fund new acquisitions through debt in the short term before interest rates increase significantly in 2023. This provides opportunity for CLAR to improve their DPU.
Interest coverage
The interest coverage for the trailing 12 months stands at 5.9 times, a decrease from 6.1 times as at 30 June 2022. The decrease in coverage is not unexpected given that the gearing ratio have increased and that the weighted average all-in debt cost have also increased to 2.2% from 2.1% as at 30 June 2022.
Nonetheless this is Favorable in my opinion CLAR was able to take advantage of the current low interest rates and increase the interest coverage from prior year. However, with interest rates continue to increase in 2022 with the series of rate hike by the Federal Reserve, there is a need to monitor this metric.
It was worth noting however that interest rates may easily rise as the world looks to tackle inflation. The Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to 5.0% by end of 2022.
Website: Fed Seen Aggressively Hiking to 5%, Triggering Global Recession
CLAR have provided the interest rate sensitivity analysis as below. Should the interest rate increase by another 1.0%, using FY2021 distribution as a base, distribution is expected to decrease by 2.2%. Together with other cost pressures, DPU may be negatively affected moving forward and investors should keep a keen eye out for the interest coverage.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.5 years as at 30 September 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
My expectation is that with this well spread out debt, it allows them to ride out the high interest rates for the next 2 years. They can reconsider re-financing once the interest rates start to decrease in the subsequent years.
Price to Book Ratio
Based on the announcement on 31 October 2022, net asset value per share was not included in the business update for the third quarter of 2022.
Using the net asset value per share of SGD2.39 as at 30 June 2022 and closing share price of SGD2.60 as at 10 November 2022, the Price to Book (“P/B”) ratio currently stands at 1.09. It is safe to use the net asset value as at 30 June 2022 as there are usually no major changes to the financial position.
The P/B ratio is Favorable for a well managed asset.
Dividend yield
On 10 November 2022, with a closing share price of SGD2.60 and dividend payout of SGD0.155 for the full calendar year 2022, this translates to a dividend yield of 5.95%. For my REIT’s benchmark, a general reasonable range for 2022 would be around 6% to 7%. As the dividend yield is around 6%, thus Favorable.
However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%. This causes the previous yields of CLAR to become unfavorable, and CLAR saw a decrease in their share price from SGD2.63 in my last article on 23 August 2022 to SGD2.17 on 4 November 2022 to provide higher dividend yields.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.155 there is potential for CLAR to see its share price drop by another 15.0% to SGD2.21. Investors will thus need to be mentally prepared that the share price might further fall to these levels as interest rates for safe assets in Singapore approaches to cross 4%.
The current dividend yield of 5.95% is thus Neutral.
Other metrics
Manager
CLAR is managed under CapitaLand Limited, which in my opinion is one of the better managers in the market. It was worth noting that the Manager had taken management fees in the form of new share units throughout the years. While this translates to a dilution of the existing holders, it also demonstrates management’s confidence in the REIT. This is Favorable in view of the long prospects of the REIT.
Tenant profile
CLAR has a well diversified tenant profile with the top 10 customers as at 30 September 2022 only account for about 16.1% of monthly portfolio gross revenue. Furthermore no single property accounts for more than 4.2% of CLAR’s monthly gross revenue. This is Favorable as CLAR will not be too reliant on any single tenant for income.
Key things to note
Acquisitions
There will be 2 new acquisitions to be completed in either 2022Q4 or 2023Q1. The acquisition is accretive and the total cost is approximate 1.9% of the total investment properties of CLAR as at 30 September 2022. While I do not think there will be any significant impact from the acquisition, investors need to take note that these acquisitions are done when interest rates are high and share price at relatively low levels. This may be dilutive to the existing shareholders.
Summary
Overall, the metrics indicate that it is favorable to invest in CLAR. Despite the drop in share price over the last few months, the fundamentals of CLAR did not worsen during this quarter. This suggests that the current share price is due to overall market sentiment, especially as safe assets have seen their yield rise considerably with rising interest rates.
The recent market conditions present opportunities for entry as the share price continues to face downward pressure, but it is possible for the share price to recover should interest rates decrease over the next few years.
Investors also will need to keep in mind that CLAR has a history of using equity funding for aggressive expansion and have to be careful of such situations, especially with share prices at relatively low levels. In order to maximize this investment, unitholders may have to continuously subscribe to the excess offerings. This might not necessary fit the passive dividend investment strategy.
Not financial advice.
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