CapitaLand Ascendas REIT: Data Center Acquisition to Drive Near-Term Growth; Units Undervalued

We retain our SGD 3.06 fair value estimate for CapitaLand Ascendas REIT A17U, or CLAR, after an in-line third-quarter business update. The portfolio occupancy rate remains stable at 94.5% as of September 2023, versus 94.4% in June 2023, with improvements in the Singapore portfolio offset by slight declines in occupancy rates in its Australian and European portfolio. The trust registered a strong positive rental reversion of 10.2% for third-quarter 2023, with its Singapore and European logistics properties delivering robust 25.5% and 28.8% positive rental reversions, respectively. Following the recent selloff of the trust’s units on concerns over high borrowing costs, we think the units are undervalued and trade at a 2024 distribution yield of 6.3%. We like the trust for its defensive quality given its well-diversified portfolio and long weighted average lease expiry.

The trust acquired a new data center in Watford, United Kingdom for SGD 214.4 million in August 2023. Management shared that the asset is occupied by five investment-grade tenants from various industries such as technology, retail, energy, and financial services. Three of the existing tenants have also been with the property for more than 10 years. Although the asset currently has a low occupancy rate of 81.8%, the seller is providing an 18-month rental top-up, which we believe is a sufficient runway for the trust to fully lease up the asset. The initial net property income yield is 9.4% and management estimates that the asset will lead to a distribution per unit, or DPU, accretion of 0.7%. Overall, we are positive on this transaction as it is DPU-accretive and increases the trust’s exposure to the data center asset class by about 15% to SGD 1.5 billion, making up 9% of its total assets under management. In our view, the data center asset class is currently benefiting from strong secular tailwinds such as the development of artificial intelligence and cloud computing that continue to drive up its demand.