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Technicals versus fundamentals highlight poor sentiment surrounding acquisitions

Goola Warden
Goola Warden • 3 min read
Technicals versus fundamentals highlight poor sentiment surrounding acquisitions
Price action suggests investors don't like acquisitions or hints of acquisitions in this part of rate cycle
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A divergence in the fundamental outlook and sound financials of a couple of S-REITs compared to the price performance and technical outlook of these REITs has emerged.

CapitaLand Ascott Trust’s performance was going great guns. On July 27, CLAS had announced a 44% y-o-y growth in RevPAU (revenue per available unit) in 1HFY2023 ended June, 26% growth in distributable income and 19% growth in distributions per stapled security (DPS) to 2.87 cents. In anticipation of this performance, CLAS’s unit price had risen almost 9% to $1.12 between the start of the year and July 27.

But, on Aug 2, CLAS’s manager announced the proposed acquisition of three properties, one each in London, Dublin and Jakarta for $530.8 million, partly financed by an equity fundraising of around $300 million comprising a private placement and preferential offer.

The preferential offer comprising 100.54 million stapled securities was not fully subscribed. According to an announcement on Aug 28, only 64.7% of the stapled securities on offer or 68.078 million stapled securities were taken up.

In 2022, CLAS had also announced an equity fundraising for an acquisition. At that point, its stapled securities declined by around 25.6% to a low of 87 cents before recovering. A similar decline would take CLAS’s price to around 83 cents.

Keppel DC REIT (KDC REIT) has not announced an acquisition. Its unit price closed at $2.02 on Oct 16 when it released its 3QFY2023 ended September business updates compared to $1.74 as a mid-day on Oct 19. There was nothing negative in either the review or outlook in the business updates. However, additional information on KDC REIT’s acquisition-based growth strategy was provided including the pipeline from its sponsor.

See also: STI and REIT indices have further upside after current retreat

Additionally, in a largely positive update, Citi provided further insights into KDC REIT’s acquisition strategy. Unwittingly, Citi’s report and concerns over Neo Telemedia, a major tenant, caused selling as soon as trading started on Oct 17, and the selling has not stopped to date.

Technically, KDC REIT is at an extremely oversold level, with its shortterm smoothed 14-day RSI below 20. Back in October 2022, when KDC REIT fell to a low of $1.60, the smoothed RSI was at 15 so the bottom is not far off. But whether KDC REIT continues to hover at its low or attempts a dead cat bounce remains to be seen.

CLAS’s technical position shows that prices have started to form some sort of a base. This does not mean that prices will not go lower, but they may not go much lower.

See also: Are S-REITs set for a re-rating following REIT index breakout?

On June 5, Lendlease Global Commercial REIT JYEU -

(LREIT) announced the acquisition of a 10% stake in Parkway Parade. Prices did not move much till August. Subsequently, the manager articulated avenues of raising cash without equity fundraising such as the possibility of divesting either Jem office tower or Sky Complex Milan. LREIT’s unit price has stopped falling.

Clearly, market watchers and investors are not keen on acquisitions, as evidenced by KDC REIT’s price action. KDC REIT’s manager had not announced any acquisition. The analysts were mulling which assets the REIT is likely to buy which was enough to cause the selldown.

Of course, analysts also have concerns over Neo Telemedia. Despite a net loss in 1HFY2023, Neo Telemedia’s operating and free cash flows are positive. The main issue may be around Neo Telemedia’s bank loans, the ability to refinance them and the collateral.

Declines in S-REITs are materialising against a backdrop of a weak market. The Straits Times Index itself is threatening to move below the psychological roundophilic 3,100 level as risk-free rates stay stubbornly high, causing the cost of capital to rise.

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