Daniel Lee

Jun 17, 20237 min read

Fundamental Look At CapitaLand Ascendas REIT [Is It Worth Investing In?]

Best Viewed On Desktop (As of June 2023)

In this article, we'll be conducting a fundamental analysis of Capitaland Ascendas REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having a high degree of capital preservation ability.

This article will be split into 6 sections:

Summary of the Analysis
Personal Opinion
Scenario Analysis: Price Target & Expected Return
First filter: Income & Distribution Statements & Valuation Ratios
Second filter: Balance Sheet Health
Third filter: Underlying Property & Tenants

For those looking for a quick analysis, you can just focus on sections 1 & 2 - summary of the analysis and personal opinion. For those who would prefer to have a deeper look into the financials, you can explore the findings in the other sections.

1. Summary of Analysis

Personal Opinion on:

Business Model: CapitaLand Ascendas REIT [CAR] is incepted in 2019 after CapitaLand acquired Ascendas REIT. After the acquisition, CAR increased the number of properties under its holding while disposing of some existing properties.

Despite the new management, it doesn’t seem like there is a change in strategy given the consistency in the underlying types and location of properties.

General Outlook: Given the current economic headwinds - higher interest rate environment, slowing global economic growth - I believe that CAR will continue to enjoy a stable top and bottom line revenue but their Weighted Average Lease Expiry will continue to experience a decrease.

As the property market becomes depressed, I suspect that CAR will experience difficulties registering capital gains as they did in the past when disposing of properties - which will result in a decrease in headline dividend yield.

Valuation & Expected Return: Based on historical performance, fundamentals and prevailing dividend yield, I believe CAR is slightly overvalued. At the current price of $2.62, long-term investors (>10 years) can expect to receive a compounded annual capital return of -2% to 1% and a 5% to 6% annual dividend yield.

What My Actions Will Be: I have placed CAR on my watchlist but would not be adding any position unless it has crossed the undervalued price point as I will require a higher margin of safety to hedge against any uncertainty of the newer management and the complexity of their underlying property portfolio. Investors who are interested in getting industrial exposure would be able to find better alternatives elsewhere.

What to watch out for:

How the financials and distribution behaviour would be in the future as the current management is not “proven” due to a lack of track record post-acquisition (completed on 1st July 2019)

What I like about the REIT:

The remaining lease for underlying properties is decent - Mostly above 30 years
Debt is managed well - both in the areas of distribution and the average cost of borrowing

What I don’t like about the REIT:

The current dividend yield is propped up by capital gains from the disposal of property which might not be sustainable
New management is not “proven” due to the lack of track record post-acquisition
Weighted Average Lease Expiry has been on a worrisome decline

2. Personal Opinion

Given the historical valuation, group performances and dividend yield, I would consider CapitaLand Ascendas REIT to be slightly overvalued, even though they are trading near the long-term average.

The reason for having the stance is because, on an objective level, the long-term average multiple is rather high which results in an unattractive dividend yield (~5%) and a low margin of safety.

Moving forward, at the current price of $2.62, long-term investors (>10 years) can expect a:

1) Capital return: -2% to 1% per year

Undervalue: $2.25 and below
Fair Value: $2.50 to $2.60
Overvalue: $2.93 and above

2) Dividend return: 5% to 6% a year

The reason for having this stance is because, from the dividend track record, the group has only been able to maintain its distribution at the current level and was unable to grow it consistently. As such, expectations for future distribution per unit increment from operations are low.

3. Scenario Analysis

Cells within the blue box represent the most realistic scenario that has the highest probability of materialising. To read the table, the horizontals represent a change in the distribution income over time while the verticals represent changes in the investor's willingness to pay.

Boxes highlighted in red represents a loss while boxes highlighted in green represent a gain based on the current price level.

Projected Target Price

Projected Target Return

4. First Filter

For this, we will be examining key metrics revolving around the financial statements, namely:

Income Statement - to examine the performance of the group as a whole
Distribution Statement - to examine the behaviour of the total distribution over time
Valuation metrics - examine the “expensiveness” of the stock relative to its intrinsic value

The purpose of the first filter is to remove companies that are either:

Not profitable - which reflects either poor management or quality of assets
Inconsistent distribution - Pays out dividends from capital instead of rental revenue
Too expensive - in terms of valuation (as viewed from the lens of distributions)

Income Statement

Findings:

From the gross income perspective, the group has posted healthy growth levels over the years as a result of its strategic acquisition.
From the property expense perspective, the management has displayed proficiency and consistency in managing expenses at around 28% of gross income
From the net income growth perspective, the management has managed to achieve higher levels of bottom-line growth as a result of the slower growth in expenses.

Overall, the behaviour from the income statement displayed signs of stability in the bottom line revenue which fits the investment objective for a dividend investment. However, investors should take note that the current management is not “proven” yet as the post-acquisition operations only occurred after 2020, which was also affected by COVID-19.

Distribution Statement

Overall, distribution per unit has been very volatile and investors should pay attention to it. Post-acquisition (2019), it does seem that the dividend distribution has recovered back to its pre-covid levels.

That said, looking at the breakdown from the net inflow for distribution, investors will realise that the distribution contributed by operations has remained relatively stable since 2017 and the bulk of the distribution per unit (20%) is contributed by capital distribution from previous disposal or distribution from tax-exempt income.

That said, one would question how sustainable the contribution from capital gains can sustain of which as an investor, I would not bank on this factor for returns.

Valuation Ratios

While the business model and performance of CapitaLand Ascendas REIT have been stable over the years, the valuation and dividend yield has not been that attractive, especially after 2018, where the dividend yield has been pushed down as a result of an increase in units in issue and also the proportion of the dividends are now supported by capital gains from the disposal.

At the current price range of around $2.60 - $2.65, the valuation of CapitaLand Ascendas REIT is slightly overvalued if we were to remove the impact of capital gains, the dividend yield from operations would only be 5% per annum.

As such, investors would be better off waiting for valuations to come back down to levels where the dividend yield from operations is at 5.5% to 6% per annum instead of being misguided by the headline dividend yield that is propped up by capital gains which may not be sustainable.

5. Second Filter

Now that we’ve established that the REIT is worth considering, let us examine the health of the business - namely balance sheet health and financing details.

Balance Sheet

Overall, CapitaLand Asendas REIT’s balance sheet is okay. The spike in invested properties and borrowings is a result of the acquisition of Ascendas REIT by CapitaLand which then form the current entity - CapitaLand Asendas REIT.

Financing Details

CapitaLand Ascendas REITs debt profile is rather well distributed over the years. As such, while there are debts due in 2023 and 2024, where interest rates are expected to be high, the overall impact on the average cost of financing would not be that bad.

That said, ceteris paribus, we can expect the distribution amount per share to continue to decline as a result of higher financing costs which will eat into the net profits.

6. Third Filter

The last consideration that we will be examining would be the nature of the underlying properties and their tenants.

Underlying Properties

Findings:

Post-acquisition, the occupancy rate of Singapore’s operation had improved decently which is a good sign of proper management.
The distribution between the type of properties had remained rather consistent over the years even after the acquisition.
The land lease profile of CapitaLand Ascendas REITs is rather healthy with a majority of the properties having more than 30 years of lease expiry. Therefore, the impact of lease decay is largely mitigated.

Tenant Profile

Findings:

Tenants are evenly distributed across the different industries which reduces the impact of concentration risk.
Weighted average lease expiry had remained consistent over the years in Singapore while declining in the US, Australia and UK/EU, probably as a result of intensifying competition and change in tenant behaviour post covid.

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