RISING interest rates weighed on CapitaLand Ascendas Reit (Clar), as the business and industrial property player saw distribution per unit (DPU) fall 6.1 per cent year on year to 7.441 Singapore cents for the six months ended Dec 31, 2023.

 

The DPU decline came even as the Reit&rsquo s H2 gross revenue rose 11 per cent to S$761.7 million, and net property income (NPI) was up 4.6 per cent to S$514.3 million.

 

For FY2023 overall, Clar&rsquo s DPU was down 4 per cent year on year to 15.16 cents, on the back of a 1.4 per cent fall in the amount available for distribution to S$654.4 million. The Reit attributed this to higher interest expenses, amid the rising rate environment.

 

&ldquo The uncertain outlook for inflation, geopolitical tensions and risk of faltering growth in China will continue to pose challenges to tenants&rsquo businesses and Clar&rsquo s operating costs,&rdquo the Reit said in its earnings statement on Thursday (Feb 1).

 

Weighted average all-in cost of debt for FY2023 rose to 3.5 per cent, up from 2.5 per cent a year earlier. Clar has S$869 million in borrowings due to be refinanced in FY2024. Based on current rates, the cost of debt is expected to rise by up to 4 per cent this year, the manager said during a results briefing on Thursday.

 

Clar&rsquo s full-year revenue was up 9.4 per cent to S$1.5 billion, driven by acquisitions completed in FY2023 and the prior year. Higher occupancy and positive rental reversions in the Singapore portfolio also lifted full-year revenue. The Reit saw a positive average rental reversion of 13.4 per cent for leases that were renewed in FY2023. It is guiding for positive mid-single digit rental reversion in FY2024.

 

The Reit completed three Singapore acquisitions in FY2023 &ndash 622 Toa Payoh Lorong 1, 1 Buroh Lane and The Shugart &ndash and bought The Chess Building in the UK. It also completed a development in Australia, MQX4, for S$161 million.

 

William Tay, chief executive of the manager, said during the results briefing that Clar would still look to acquire assets in the countries it is already in, except for Australia, where conditions do not currently allow for accretive acquisitions.

 

In response to a question on funding for potential acquisitions, Tay noted that Clar has around S$600 million of debt headroom before its gearing hits 40 per cent. It could cross 40 per cent, as with the gearing for some other Reits, but Clar&rsquo s guiding principle is to keep it below that, he added.

 

&ldquo We will leave our options open on whether it is debt or equity funded,&rdquo he said, adding that some of the Reit&rsquo s debt headroom would also be taken up by asset enhancements or redevelopments.

 

&ldquo We are prepared to look at developments right now in Europe and US. That actually gives us an opportunity to go into certain cities or locations where we feel there is growth potential,&rdquo he said.

 

One of the redevelopments being evaluated is the conversion of its Welwyn Garden City data centre in the UK into a 60 megawatt-powered shell data centre targeting hyperscalers.

 

Despite higher utility expenses and property taxes in the Singapore portfolio, Clar&rsquo s FY2023 NPI rose 5.6 per cent to S$1 billion. For FY2023, the largest sources of new demand by gross rental income were logistics and supply chain management, engineering and the biomedical, as well as agri and aquaculture sectors.

 

The Reit has a portfolio of 227 investment properties in three key segments: business space and life sciences, industrial and data centres, as well as logistics. These assets are mainly in Singapore, but also in Australia, the US and the UK. Total occupancy stood at 94.2 per cent as at Dec 31.

 

The weighted average lease expiry (Wale) of Clar&rsquo s portfolio stood at 3.9 years. About 14.6 per cent of its gross rental income will be due for renewal in FY2024. As at Dec 31, the Reit had an aggregate leverage ratio of 37.9 per cent, higher than the 36.3 per cent ratio the year before.