Analysts are positive on AIMS APAC REIT (AA REIT), with the REIT having delivered on acquisitions to drive distribution per unit (DPU) growth of approximately 6% in the past year.
For 2HFY2022 ended March, the REIT reported DPU of 4.71 cents, down 4.8% y-o-y. The lower DPU was due to the difference in timing of interest payments for $250 million perpetual security issuance made in Sep 2021, and the completion of Woolworths HQ acquisition in mid-November 2021. AA REIT’s DPU for the FY2022 stood 5.7% higher y-o-y at 9.46 cents.
According to the REIT manager, there is room for the REIT to see steady growth moving forward. There is also room from both organic growth involving rent escalations and rent uplift, and inorganic growth from redevelopment cum acquisitions, says the manager during an investor meeting with RHB Group Research.
In his latest report dated April 28, RHB analyst Vijay Natarajan. has kept a “buy” rating on AA REIT with a lowered target price of $1.66 from $1.72.
The REIT’s full-year DPU stood slightly below his full-year forecasts at 98% of his estimates.
“About 62% of its debt is fixed (30% is hedged via swaps) and based on our sensitivity analysis, every 25 basis point (bps) increase in rates will have a 1% impact to its DPU (using conservative 62% fixed),” says the analyst.
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AA REIT’s portfolio value was up 1% mainly coming from Singapore and up 1.6% y-o-y on the back of income growth, with minimal impact expected from utility charges as they mostly pass through for the company's portfolio, he adds.
During the FY2022, the REIT reported strong positive rental reversion of 14.7% y-o-y driven by Illumina’s renewal for a long 10-year master lease, which has inbuilt rental escalations of 5% every two years. Illumina is a key tenant in the REIT’s Singapore portfolio.
All other segments recorded healthy positive rent reversions with a similar outlook ahead, with the exception of its business parks in Singapore, which saw negative rental reversions of 8%.
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Meanwhile, portfolio occupancy was flattish q-o-q at 97.6%; approximately 14.4% of leases by income are due in FY2023 including a logistics master lease.
The analyst expects occupancy to remain at the current high levels in FY2023.
On the acquisition of 315 Alexandra Road, the REIT signed an extension agreement to have it potentially completed by June 8. The REIT announced its intention to acquire the building in January 2021. According to the REIT manager, the delay of the acquisition is largely due to the leasing structure of the property, in particular JTC’s anchor tenant rule.
Should the acquisition come through, the REIT’s gearing levels will increase to 40% from its current 37.5%, in the event of full debt funding.
“Management is comfortable with the 40% level but will explore various funding options depending on market conditions. In addition, it has an untapped 0.5 million sqft of portfolio gross floor area which can be redeveloped including a potential conversion of a building into a data centre,” says Natarajan.
In addition to his lower target price estimate, Natarajan has lowered his DPU estimates for FY2023 to FY2024 by 3% to 4% after factoring in acquisition delays and tweaking interest cost assumptions.
DBS Group Research analysts Dale Lai and Derek Tan have also kept their “buy” rating on AA REIT with a lowered target price of $1.55 from $1.60.
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In their April 28 report, the analysts see potential for further organic growth in AA REIT’s portfolio. This is considering the possibility of tapping into unutilised gross floor area (GFA) of more than 500,000 sq ft within its Singapore portfolio, with Lai and Tan noting that Woolworths HQ presents the opportunity to leverage on a further approximately 1.5 million sq ft of unutilised GFA.
Moreover, the annual rental escalations for its master leases provide for organic revenue growth of approximately 1%-3%.
With the stock’s recent inclusion into the FTSE EPRA NAREIT Developed Asia Index, Lai and Tan believe that the improved trading liquidity of AA REIT and potential lowering in cost of equity would enable it to embark on further accretive acquisitions, despite stiff competition for good-quality income-producing assets.
The analysts add that they see their estimates as “conservative” as they have assumed a potential equity fundraising of around $52.4 million to fund the acquisition of 315 Alexandra Road and manage its balance sheet. Any amount less than that will present an upside to the analysts’ earnings estimates.
As at 4.58pm, AA REIT is trading flat at $1.42 at a FY2023 P/B ratio of 0.99x and dividend yield of 6.8% according to RHB’s estimates.
