Ascendas REIT vs CapitaLand Integrated Commercial Trust - DBS Research 2021-02-10: Clash Of The Titans

Ascendas REIT vs CapitaLand Integrated Commercial Trust | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CAPITALAND INTEGRATED COMM TR (SGX:C38U)

Ascendas REIT vs CapitaLand Integrated Commercial Trust - Clash Of The Titans

Head-to-head: Ascendas REIT (AREIT) vs CapitaLand Integrated Commercial Trust (CICT)

Battle round between AREIT vs CICT

  • Market Cap:
  • FY20-FY22 DPU CAGR forecast:
  • We note that CapitaLand Integrated Commercial Trust's share price has re-rated by ~24% from the recent low in Oct 20, which we believe is due to the improved investor sentiment towards the commercial (retail and office) sectors on the back of a recovering economy. However, with FY21F yields trading quite similar to Ascendas REIT, investors have been asking if the current divergent price performance will continue. We thus look at both stocks holistically in terms of earnings (growth and risk) and historical trading yields to get a relative preference at current levels. It was indeed a very close fight between the two as both has stacked up quite similar in terms of their attributes.
  • After considering various factors including potential growth, earnings risk, pipeline and valuation, we believe that Ascendas REIT edges out in this neck and neck race. While CapitaLand Integrated Commercial Trust’s growth potential is higher at 2-year CAGR of 18% largely riding on a retail recovery, our preference is for Ascendas REIT given its lower downside earnings risks (in the event of a slower than expected recovery) while relative valuations are also more attractive given CapitaLand Integrated Commercial Trust's share price has run ahead.
  • Comparatively, Ascendas REIT has been a laggard vs their respective peers in the large-cap industrial S-REIT space.

Round 1: Earnings Downside Risk

Ascendas REIT’s portfolio has lower earnings risks than CapitaLand Integrated Commercial Trust, in our view.

  • On a relative basis, we believe that Ascendas REIT’s portfolio has lower earnings risks given ~74% of its portfolio comprises of business parks, logistics and hi-specs & data center which are asset classes that continue to see growth or support tenants who are within growing industries. The demand-supply dynamics in this industrial sectors remain conducive for landlords to nudge rents up a little in 2021, which implies that organic growth outlook remains on an uptrend.
  • We do note the higher supply in the light industrial and flatted factories in 2021 due to a delay in completions, and we estimate that ~9% of Ascendas REIT’s GRI could have some earnings risks (in both occupancies and rental growth potential) which we believe is manageable.
  • A review on the tenant mix of CapitaLand Integrated Commercial Trust’s portfolio implies that trade sectors that could potentially see downside risks to occupancies or rental reversions contributes ~54% of GRI from both its retail and office assets. We identify these sectors that have seen either
    1. negatively impacted by COVID-19 pandemic (e.g. travel & hospitality, fashion etc) or
    2. face potential downsizing from adoption of flexible work arrangements to crystalize cost savings (for example the financial institutions).
  • While the number appears large, we believe that the actual downside risk will be much lower as we believe that a smaller subset of these subsectors will be seeking more financial assistance, either from the government or the landlord. In FY21, CapitaLand Integrated Commercial Trust’s management continue to focus on tenant retention especially in its retail malls to ensure healthy occupancy rates.

Round 2: Acquisition pipelines

Ascendas REIT and CapitaLand Integrated Commercial Trust have ~S$1b of realizable sponsor pipeline.

  • Although CapitaLand Integrated Commercial Trust has a larger sponsor pipeline of ~S$3b (including CapitaLand (SGX:C31)’s 50% stake in ION Orchard) compared to Ascendas REIT’s ~S$2bn, we estimate the realizable pipeline in the near-term would be S$1b and S$0.7b for Ascendas REIT and CapitaLand Integrated Commercial Trust respectively, which provides investors with good visibility that may provide upside surprise to earnings estimates, in our view.
  • Looking through the potential realizable pipeline assets in the near-term that may be offered to the respective S-REITs, we believe that Ascendas REIT’s pipeline of largely Singapore focused Business Parks may be preferred by unitholders as the target assets may comprise of the remaining 75% stake in Galaxis, 5 Science Park Drive (5SPD) and Ascent, assets that we believe to be value accretive to the REIT and highly anticipated by investors and these assets may be offered for injection in FY21.
  • On the other hand, while the jewel remains the 50% stake in ION Orchard, we believe that CapitaLand Integrated Commercial Trust’s realisable pipeline assets comprises the portfolio of four office assets in Japan in the near term. While these assets spreads (yields over the borrowing costs) is attractive, the flattish rental profile of Japan real estate may mean that CapitaLand Integrated Commercial Trust will be buying into more income rather than growth.

Round 3: Valuations

Ascendas REIT is a laggard vs its peers (large cap industrials) on all three fronts – share price performance, dividend yield and P/NAV.

Rachel TAN DBS Group Research | Dale LAI DBS Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-10
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