CapitaLand Ascendas REIT Earnings: Challenging Business Park Market; Fair Value Down 5% to SGD 2.90

CapitaLand Ascendas REIT’s, or CLAR's second-half 2023 net property income was in line with our expectations, growing 4.6% year on year due to contribution from new acquisitions, partially offset by an increase in operating expenses. However, distribution per unit, or DPU, fell 6.1%, year on year, missing our expectation due to higher-than-expected borrowing costs and an enlarged unit base. After reducing our leasing assumptions for the trust’s business park assets, which make up about 38% of its portfolio, our fair value estimate is lowered to SGD 2.90 from SGD 3.06. We think the trust is fairly valued currently. We are concerned about the high business park vacancy rate of 21.6% (according to Jurong Town Corporation) for Singapore as at Dec. 31, 2023 and this may be worsened by additional new supply of 147,000 square meters in 2024. Also, market demand is weak currently, with technology companies laying off employees and putting their excess office space on the market. Further, the leasing market for business space in the U.S. and Australia remains challenging, where a significant proportion of office workers still retain a hybrid or remote work arrangement. That said, we note that management is working hard to lease out the properties and the trust is able to maintain occupancy rates that are above that of the market.