Latest / Investor Exchange / How CapitaLand Ascendas REIT Is Future-Proofing Your Investment – FY2025

Transcript

How CapitaLand Ascendas REIT Is Future-Proofing Your Investment – FY2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  Let's dive straight in. We're doing our deep dive on one of the real giants
• 0:12
  on the Singapore market. That's Capital and Ascendas Reit or Claire.
• 0:15
  Their full year 2025 results came out a couple of weeks back, February 5th.
• 0:20
  And, you know, looking at these numbers, I get the feeling we're looking at
• 0:22
  a company that's, well, it's in the middle of a very expensive identity crisis.
• 0:27
  That's a pretty provocative way to put it, but I don't think you're wrong.
• 0:30
  I mean, if you just look at the scale of what they did in 2025,
• 0:33
  you're talking about $1.5 billion in new acquisitions, huge sell-offs,
• 0:38
  massive projects to upgrade existing buildings.
• 0:41
  This is not a business as usual kind of report. This is a portfolio trying to,
• 0:45
  I don't know, sprint while changing its shoes.
• 0:47
  Right. And that sprint, it has a cost. So let's just get to the elephant in
• 0:51
  the room right away, because this is what every investor is looking at.
• 0:52
  The top line numbers, They look good. They're green.
• 0:55
  Gross revenue is up 1% to S1.539 billion dollars.
• 1:00
  Net property income, the NPI, that's up 1.7% to S1.068 billion dollars.
• 1:06
  So the machine is actually making more money than it did last year.
• 1:09
  But the distribution per unit, the DPU, the actual cash that hits your bank
• 1:14
  account if you're a unit holder, that's down.
• 1:16
  It fell 1.3% to just over 15 cents.
• 1:19
  It's the classic divergence, isn't it? Corporate growth versus shareholder yield. Exactly.
• 1:23
  So, I mean, play devil's advocate for me. If I'm a long-term holder,
• 1:26
  I'm seeing the company get bigger.
• 1:28
  It's buying all these shiny new assets in the U.S. and Singapore.
• 1:31
  But my personal payout is shrinking. Is this just management,
• 1:34
  you know, empire building?
• 1:35
  Or is there a real strategy here that justifies this dilution?
• 1:39
  It's a very legitimate question.
• 1:41
  The DPU drop is, well, it's a
• 1:43
  mathematical thing. It's driven by what they call the enlarged unit base.
• 1:46
  You might remember they did a private placement back in May 2025.
• 1:50
  They issued over 200 million new units. Right. To raise cash.
• 1:54
  To raise cash. They needed that money to fund the acquisitions we're about to talk about.
• 1:58
  So the argument from management is that this is a transition.
• 2:01
  You know, they're swapping out these older, maybe low-growth industrial buildings
• 2:06
  for high-growth new economy stuff.
• 2:08
  We're talking data centers, life sciences. But that swap, it's not frictionless, is it?
• 2:14
  You've got transaction costs. There's a time lag between raising the money and
• 2:18
  actually spending it. And then there's the dilution itself.
• 2:21
  Precisely. And in 2025, we saw that friction. I mean, look, the total distributable
• 2:26
  income, it actually went up 1.4 percent to S678.3 million dollars.
• 2:31
  So the pie did get bigger.
• 2:32
  But because they had to slice that bigger pie into way more pieces to fund this
• 2:36
  whole transformation, your individual slice got a little bit thinner.
• 2:39
  The bet is that these new assets, especially the data centers and logistics
• 2:43
  hubs, will grow so much faster that they'll push the DPU back up eventually.
• 2:47
  Eventually is doing a lot of heavy lifting in that sentence.
• 2:50
  OK, so let's look at what they actually bought with all that diluted capital.
• 2:54
  S1.5 billion dollars. We know about the big data center in Singapore and the
• 2:58
  logistics property in Somerville, South Carolina. And don't forget the redevelopment
• 3:02
  at 5 Science Park Drive. Right.
• 3:04
  So looking at those, are these new assets actually performing well enough to justify the price?
• 3:10
  Because if you dilute your shareholders just to buy assets that yield the same
• 3:14
  as what you sold, well, that's just a zero-sum game.
• 3:17
  Yeah, and the key metric is yield accretiveness.
• 3:20
  The data center in Singapore, that's a strategic play on scarcity.
• 3:23
  You know, with the power constraints we have here, an existing data center with
• 3:28
  power already allocated to it is incredibly valuable.
• 3:31
  You're not just buying a building. You're buying infrastructure capacity that's
• 3:34
  almost impossible to build from scratch right now.
• 3:37
  That has a sticky long-term value that, say, a standard old factory just doesn't.
• 3:42
  So it's a quality upgrade.
• 3:43
  It is, absolutely. And then you look at the flip side. What did they sell?
• 3:46
  They divested nine properties worth nearly half a billion dollars.
• 3:50
  These were older assets in Singapore, Australia, the U.S., and the U.K.
• 3:53
  Like 31 UB Road 1 in Singapore.
• 3:56
  These are buildings where the rent probably wasn't going to go up much more
• 3:59
  or the maintenance bills were starting to climb.
• 4:01
  So by recycling that capital into the new acquisitions, they're essentially
• 4:05
  hitting reset button on depreciation and moving into sectors with much higher growth potential.
• 4:11
  Okay, so the strategy is the great rotation.
• 4:14
  Sell the old, buy the new.
• 4:16
  But let's talk about the operational drag here, specifically the vacancies.
• 4:20
  This is where the whole growth story hits a bit of a speed bump.
• 4:23
  The overall portfolio occupancy dropped to 90.9%. That's down almost two full percentage points.
• 4:31
  For a REIT this big that usually runs such a tight ship, some 91 percent feels a little sloppy.
• 4:37
  It's not ideal, no, but you have to kind of peel back the onion on that number.
• 4:40
  If you look at just the Singapore portfolio, it's actually pretty strong.
• 4:43
  The problem child, and it has been for a little while, is the overseas portfolio,
• 4:47
  specifically the United States. So the U.S.
• 4:50
  Occupancy numbers were the main drag on the average. Yes.
• 4:53
  The report points directly to vacancies in the U.S. and some of the business spaces in Singapore.
• 4:58
  In the U.S., they had a major tenant move out of 510 Townsend Street in San Francisco.
• 5:03
  And we all know the San Francisco office and tech industrial market has been
• 5:06
  challenging, to put it mildly.
• 5:09
  Challenging is very polite. It's been a bloodbath for some landlords over there,
• 5:13
  which raises a concern, right?
• 5:15
  Clearly, I.R. always talks about its international footprint as a strength.
• 5:19
  But right now, those U.S. assets look more like a liability.
• 5:22
  Is this a structural problem with what they bought over there?
• 5:24
  Well, that's the bear case, isn't it? The argument that they bought into U.S.
• 5:27
  Tech hubs at the peak and now they're dealing with the fallout from hybrid work
• 5:31
  and all the tech layoffs.
• 5:32
  But, you know, 510 Townsend is a specific building issue. The wider U.S.
• 5:37
  Logistics portfolio is generally holding up better. But when your portfolio
• 5:40
  is huge, just a few big vacancies in high value buildings like that can really
• 5:44
  pull the headline number down.
• 5:46
  The big question for 2026 is, can they fill that space?
• 5:49
  And at what price? because if they have to slash rents just to get a tenant
• 5:54
  into that San Francisco building, then that net property income growth is going to stall out.
• 5:58
  Well, that leads us to maybe the most confusing, but also maybe the most bullish
• 6:02
  number in the entire report.
• 6:04
  We just said occupancy is down. Demand seems a bit soft in places. And yet,
• 6:09
  The rental reversion was a positive 12.0%. This is the number that made me do a double-take. Yeah.
• 6:16
  Plus 12%. That means when an old lease ends, the new lease they sign is,
• 6:21
  on average, 12% more expensive.
• 6:23
  In the last quarter alone, for renewed leases, it was almost 20% higher.
• 6:27
  How do you square falling occupancy with massive rent hikes?
• 6:30
  It suggests there's a real split in the portfolio, a bifurcation.
• 6:34
  It means that for the assets that are in demand, you know, the good logistics
• 6:37
  hubs, the science parks, the Singapore data centers, the market for that space is incredibly tight.
• 6:43
  Tenants are basically fighting for that space and it's driving prices up.
• 6:46
  So KLEAR is flexing huge pricing power on, what, 90% of its portfolio?
• 6:51
  So basically saying we'd rather have an empty space in San Francisco than lower
• 6:55
  our rents on everything else. To an extent, yes.
• 6:58
  It's prioritizing price over volume.
• 7:00
  It also shows that the whole rejuvenation strategy is working,
• 7:04
  at least on the revenue side.
• 7:06
  The assets they're keeping and upgrading are the ones commanding these premium rents.
• 7:10
  If they were just holding on to a bunch of old factories, you wouldn't see double-digit
• 7:14
  reversions. You'd be lucky to keep rents flat.
• 7:16
  That makes sense. Quality over quantity, again. But what about the risk?
• 7:20
  19.6% of their gross rental income is expiring in 2026.
• 7:25
  That is a huge chunk of revenue up for grabs. It is.
• 7:28
  Almost a fifth of the whole portfolio needs to be renewed this year.
• 7:32
  In a weak market, you'd call that a lease expiry cliff. It's terrifying.
• 7:35
  But in a market where you're getting plus 12 percent reversions, that's an opportunity.
• 7:40
  If they can roll those leases over at the current market rates,
• 7:43
  that's a massive organic revenue boost just built into the year.
• 7:47
  Assuming the economy holds up.
• 7:48
  Assuming the economy holds up and assuming they don't have more major tenants
• 7:51
  just walking away. OK, let's pivot to the balance sheet.
• 7:55
  This is usually where REITs get into trouble when they're expanding like this.
• 7:58
  They spent S1.5 billion dollars.
• 8:01
  Their leverage is at 39.0 percent. Is that manageable? Yeah, it's very healthy.
• 8:06
  The regulatory limit is 50 percent, so they have a big 11 percent buffer.
• 8:10
  In dollar terms, that's about F4.2 billion dollars of debt headroom.
• 8:16
  I mean, they could theoretically go out and buy another small REITs entire portfolio
• 8:19
  without issuing a single new share. But what about the cost of that debt?
• 8:24
  This is the other anomaly, where in February 2026, interest rates have been
• 8:28
  high across the globe for a couple of years, only just starting to stabilize.
• 8:32
  Yet, Clara's weighted average all-in cost of debt actually dropped.
• 8:36
  It went down to 3.5% from 3.7%. How on earth did they manage that?
• 8:40
  Most other REITs are seeing their interest cards creep up. It's a real testament
• 8:44
  to their treasury team and their credit rating.
• 8:46
  Moody's REITs them A3. That's a fortress balance sheet rating.
• 8:49
  It lets them issue debt at much, much better rates than their smaller competitors.
• 8:53
  Is there a catch, though? Is this just a temporary dip because they got lucky with some refinancing?
• 8:57
  Not lucky so much as strategic.
• 8:59
  They have a really well spread out debt maturity profile, so they didn't have
• 9:03
  this giant wall of debt all coming due right at the peak of the rate hiking cycle.
• 9:08
  By blending in different cheaper sources of debt and using things like green
• 9:12
  financing, which can sometimes save you a few basis points, they've actually
• 9:16
  managed to push their overall cost down.
• 9:18
  3.5% is a serious competitive advantage. If a smaller competitor is borrowing
• 9:23
  at, say, 4.5% or 5%, Tillyar can bid for the same building and make the numbers
• 9:29
  work when the other guy can't. Exactly.
• 9:31
  It lowers their hurdle rate for acquisitions. They can buy a property yielding
• 9:35
  5% and still make a healthy profit spread.
• 9:38
  A competitor borrowing at 5% can't even touch it. This is why scale matters
• 9:42
  so much in this business.
• 9:43
  Let's talk about who's actually paying the rent, the tenants.
• 9:46
  We mentioned the tech issues in the U.S., but when you look at their top 10 tenants.
• 9:50
  It feels very sturdy. It is. You have the Singapore government effectively through different agencies.
• 9:55
  You've got Singtel, DBS, Citibank, Stripe, CA Group.
• 9:59
  It's a mix of like sovereign stability and new age tech growth.
• 10:02
  And you should look at the shift in the asset classes themselves.
• 10:05
  Business space and life sciences now make up 44% of a whole portfolio's value.
• 10:11
  Industrial and data centers are at 32% and logistics is at 24%.
• 10:15
  I want to double click on that 44% in business space and life sciences.
• 10:20
  I think a lot of people hear industrial REITs and they just picture warehouses and forklifts.
• 10:25
  But nearly half the value here is in high-spec labs and, you know, campus-style offices.
• 10:30
  That's the life science pivot. And it's absolutely crucial for the whole investment thesis.
• 10:34
  A warehouse tenant can leave relatively easily. They just pack up their pallets, a life science tenant.
• 10:39
  They've installed millions of dollars of specialized ventilation,
• 10:42
  clean rooms, custom power grids. They're incredibly sticky.
• 10:46
  The leases in that sector tend to be much longer. It just reduces the overall
• 10:49
  volatility of the portfolio. So they're trading simple, high-churn assets for
• 10:53
  complicated, high-stickiness assets.
• 10:56
  Which brings us to the Asset Enhancement Initiatives, or AEIs.
• 10:59
  They've committed over $730 million to these projects. That's a huge amount
• 11:04
  of money just for renovations.
• 11:06
  It is, but you should think of it as organic acquisition.
• 11:09
  If you have a 20-year-old building at 5 Science Park Drive, it might be worth
• 11:13
  X. If you spend $100 million to gut it and turn it into a modern Greenmark Platinum
• 11:20
  Life Science Hub, it's now worth X plus a huge premium.
• 11:23
  And you can charge double the rent.
• 11:26
  The return on investment for these AEIs is often much higher than what you can
• 11:30
  get by just buying a finished building on the open market.
• 11:33
  Because you already own the land. Right. You're not paying a premium to some
• 11:36
  other seller. You're unlocking value that you already control.
• 11:39
  In a high interest rate world, AEIs are often the smartest way to grow.
• 11:43
  So looking ahead to the rest of 2026, the report says they have a cautiously optimistic outlook.
• 11:49
  They point to the U.S. economy growing, the Fed stabilizing policy,
• 11:52
  Europe slowly getting back on its feet.
• 11:54
  But they also flag things like geopolitical tensions and tariffs.
• 11:58
  Yeah, the tariff risk is a real one for their logistics tenants.
• 12:01
  If trade wars heat up, the flow of goods slows down and then demand for warehouse space drops.
• 12:06
  That's the big macro risk. But the internal risk and the internal opportunity
• 12:10
  is that U.S. vacancy. So if they can fix the U.S. portfolio?
• 12:14
  The stock gets a re-rating. I think so, yeah. If they can get that 90.9% occupancy
• 12:20
  back up to, say, 93% or 94% while still getting high single-digit rental reversions,
• 12:27
  then the DPU growth will come back.
• 12:29
  The dilution drag from last year will fade, and the acquisition growth will finally kick in.
• 12:35
  And if they can't, if San Francisco stays dead and the logistics market softens,
• 12:39
  then you might see more divestments.
• 12:40
  They could cut their losses on some of those underperforming U.S.
• 12:43
  Assets and just bring the money back home to Singapore or Australia,
• 12:47
  they've shown they aren't sentimental. They're not afraid to sell.
• 12:50
  I want to go back to the leverage for just a second. We said they have $4.2
• 12:53
  billion in debt headroom.
• 12:55
  We're entering a period where interest rates are probably stable,
• 12:58
  maybe even dipping a bit.
• 12:59
  There are a lot of distressed real estate owners out there right now,
• 13:02
  people who can't refinance their loans.
• 13:03
  Does KELIR go on the offensive in 2026? That is the multi-billion dollar question.
• 13:09
  Their CEO, William Tay, has positioned the balance sheet perfectly for that exact scenario.
• 13:14
  They have the dry powder. They have the cheap debt. If they see a portfolio
• 13:18
  of data centers or prime logistics parks being sold at a distressed price,
• 13:23
  they're one of the very few players in the world who can just write the check.
• 13:27
  So 2025 was the year of rejuvenation.
• 13:31
  Cleaning house, taking the hit on DPU. 2026 could be the year of aggression.
• 13:36
  I'd probably call it opportunistic dominance. They don't have to buy anything.
• 13:40
  They can just focus on filling their empty buildings and finishing the renovations.
• 13:43
  But if the market offers them a bargain, they're ready to pounce.
• 13:47
  Okay, so let's summarize the scorecard. Strong top-line growth.
• 13:50
  Really impressive rental reversions that prove the quality of their best assets.
• 13:54
  And a fortress balance sheet with a cost of debt that should make their competitors
• 13:58
  jealous. The negatives.
• 14:00
  DPU dilution from raising all that
• 14:02
  equity, and these persistent vacancy headaches, especially in the U.S.
• 14:06
  That's a fair summary. It's a high-quality ship sailing through some choppy waters.
• 14:10
  They've taken on a bit of water, the dilution, the vacancies,
• 14:13
  but they did it to upgrade the engine. Now we just have to see if the new engine
• 14:16
  actually makes the ship go faster.
• 14:19
  And for you, the investor, the patience it requires is kind of the price of admission.
• 14:23
  You're waiting for all that rejuvenation to finally turn into cold, hard cash flow.
• 14:28
  Okay, one final thought before we go. Yeah. We talked about the big pivot to data centers.
• 14:32
  Everyone is hyping AI right now, and Clio AR is buying into that hype with billions of real dollars.
• 14:39
  Is there a risk that this is the dot-com bubble of real estate?
• 14:42
  Are they buying these data centers at the absolute top of the market?
• 14:46
  There's always that risk. But unlike the dot-com era, where people were buying,
• 14:51
  you know, vaporware, data centers are physical things. They're power and cooling infrastructure.
• 14:57
  Even if the AI hype cools down, the general digitization of the economy isn't going backwards.
• 15:03
  The risk isn't so much demand, I think, but obsolescence.
• 15:06
  Technology changes so fast. A data center built today might be inefficient in
• 15:11
  five years, which is why that rejuvenation strategy probably never really ends.
• 15:16
  They'll always have to be recycling their capital. A treadmill you can never quite step off of.
• 15:20
  Fascinating stuff. We'll have to see how that U.S. portfolio looks by the time
• 15:23
  the mid-year results come out. I will be watching that occupancy number like a hawk. Same here.
• 15:28
  That's all the time we have for this deep dive into Capital and Ascendus read.
• 15:32
  A huge thank you to everyone listening.
• 15:34
  Before we go, I do need to read our standard disclaimer, so please pay close attention.
• 15:38
  This content is intended to serve strictly and only as an informational,
• 15:42
  independent, objective summary of recent events and should in no way be interpreted,
• 15:47
  construed, or relied upon by any party as insight, information,
• 15:50
  or financial advice. Thanks, everyone. See you on the next one.