RHB Bank Singapore analyst Vijay Natarajan is keeping “buy” on AIMS APAC REIT (AA REIT) with a higher target price of $1.48 from $1.47. The analyst’s Jan 9 report comes after the REIT two of its master leases on Jan 8, which he sees as a plus. He has also raised his FY2024 to FY2026 earnings estimates by 1% after factoring in the lease extensions.
The master leases were renewed with KWE, a subsidiary of major Japanese freight forwarding and logistics group, Kintetsu World Express, and Aalst Chocolate, a leading chocolate manufacturer and wholly-owned subsidiary of American global food corporation Cargill.
KWE is AA REIT’s fourth largest tenant, accounting for around 6% of its 1HFY2024 ended Sept 30, 2023 income.
Natarajan writes: “This tenant has been occupying the 7 Bulim Street asset since 2014 (this asset was acquired by the REIT in October 2020). The new lease will extend until December 2028, with positive rental reversions expected to be from the high single digits to mid-teens and added rental rate escalations.”
Aalst Chocolate, on the other hand, has been a tenant since 2007 at 26 Tuas Avenue 7, and accounts for around 1% of AA REIT’s income.
Aalst will be signing a 10-year extension of its lease to April 2035.
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Following the renewals, the REIT’s overall weighted average lease expiry (WALE) will increase to 4.6 years from 4.2 years, which is one of the highest among the S-REITs.
“The lease extensions should also boost the valuations of the assets, in our view,” he writes.
Beyond the two master lease renewals, Natarajan is overall positive on AA REIT, noting that its Singapore logistics assets still enjoy healthy double-digit rental reversions amid favourable demand-supply dynamics. At the same time, the REIT enjoys income stability from its long-lease assets in Australia with annual rental rate hike clauses built in.
“Asset enhancement benefits should kick in later this year, and the REIT remains in a fairly healthy financial position,” writes the analyst.
The analyst also likes AA REIT’s income profile, which offers stability from around 44% from master leases with balanced multi-tenanted leases providing growth.
For the FY2024, the analyst expects the REIT’s overall portfolio occupancy rate to remain healthy at above 98% with healthy positive rental reversions of high single digits to low double digits.
Currently, AA REIT’s gearing remains “healthy” at 32.1%, although Natarajan has not factored in the REIT’s two perpetual securities (perps) due for rate resets, with the first at $125 million in August 2025 and the second at $250 million in September 2026, noting that depending on market conditions, might partly need to be refinanced via debt.
Meanwhile, asset enhancement initiatives (AEI) are currently ongoing at two properties, with the first involving a thorough upgrade from an existing logistics asset into a prime logistics facility and the second a repositioning of an existing high-specification industrial asset, which the analyst thinks should result in a 30% rent uplift.
The AEIs are expected to cost $32 million, with a targeted return on investment (ROI) of 7% to 8%.
Key drivers noted by Natarajan include the REIT’s “high-quality” industrial assets in Singapore and Australia, of which the majority are logistics assets, proven track record in redeveloping and enhancing assets and its healthy balance of long master leases and multi-tenant assets.
Conversely, key risks include shorter land leases for industrial assets in Singapore, stake selldown by a major shareholder and rising interest rates and taper tantrums.
As at 11.30 am, units in AA REIT are trading flat at $1.34
