AIMS APAC REIT (“AA REIT”) had a spectacular run up recently. Given the lack of price action over the last few years, this stock has been likened to be the equivalent of a “fixed deposit” stock. This might change in the near future, as the manager highlighted the possibility of converting selected assets into data centers in the medium term. A prospect that is most welcoming given the increasing technology driven economy the world is progressing into.
Background
AA REIT is a real estate investment trust listed on the Mainboard of the Singapore Exchange Securities Trading Limited. Their investment mandate is to invest in high quality income-producing industrial real estate throughout Asia Pacific.
Below is a list of their properties as at 31 March 2021.
Their tenant base are leaning more towards the Logistic (34.8%), Telecommunication (13.3%), and Engineering (11.8%). The rest of the industries individually are below 10% of their 4Q FY2021 Gross Rental Income. Refer to the the breakdown below.
It was worth noting that they have an increasing exposure towards the logistics industry over the year. In view of the impacts of Coivid-19, logistics is one of the more resilient industries.
Their revenue is also not concentrated on any single key tenant. The top tenant contributes 13% of revenue and the top 10 tenants contributes to 47% of the total revenue.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 05 May 2021, it was noted that Gross revenue have increased by 3.2% but DPU have decreased by 5.8% year on year respectively. This was mainly due to a property tax refund of $2.3 million due to change in annual value assessed by the Inland Revenue Authority of Singapore as well as higher costs arising from the conversion from master lease to multi-tenancy leases.
In the short-term, this metric is Unfavorable as the expenses will directly affect the DPU. This however is favorable as it is a one-off event and gross revenue have improved in the current year. With the conversion from master lease to multi-tenancy leases, this will enable AA REIT to increase their diversification of tenants and not be over reliant on any tenants for income.
Occupancy
Occupancy rate as at 31 March 2021 stands at 95.4%. This is also a significant improvement from the prior year, which stood at 89.4%. This is Favorable as it is above my expected healthy occupancy rate of 95% and AA REIT have been able to fully utilize their assets, which in turn contributed to the increase in gross revenue. Bear in mind though the increase in occupancy is less than proportionate to the increase in gross revenue, indicating that the new leases are at lower rental rates. This further lends weight to the unfavorable assessment of DPU.
Gearing ratio
Gearing ratio stands at 33.9% as at 31 March 2021. This to me is considered Favorable as it means there is sufficient headroom from the MAS raised limit of 50% to fund new acquisitions through debt. This provides opportunity for AREIT to improve their DPU should they obtain new loans in the current suppressed low interest rates environment.
Interest coverage
The interest coverage for the trailing 12 months stands at 4.0 times. This is Unfavorable in my opinion. However as the general interest rates are hinted to continue to stay low for an extended period of time and with AA REIT’s low gearing ratio, I am expecting this indicator to turn favorable in the long run as AA REIT take up new loans at lower interest rates.
Debt maturity profile
Weighted average term to maturity of their debt stands at 2.3 years as at 31 March 2021. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 1.15. This is computed using the closing share price of SGD1.58 on 16 July 2021 and the net asset value per share of SGD1.36 as at 31 March 2021. The P/B ratio is Favorable.
Dividend yield
At 16 July 2021, with a closing share price of SGD1.58 and dividend payout of SGD0.085 for the full calendar year 2020, this translates to a dividend yield of 5.38%.
The dividend yield is Reasonable. Given that the exposure of this REIT is to industrial properties which tend to be more resilient to Covid-19, thus more stable. It was worth noting that the yield is not consistent, and the drop in dividend in 2020 shows how it is not spared during Covid-19. However, the dividend has still been high and is sustainable, which represents a good recurring income for investors.
A lower dividend was recorded in 2021 as the year have not ended yet at the time of writing.
Other metrics
Index Inclusion
In the last one year, AA REIT have been included into the MSCI Singapore Small Cap Index and FTSE ST Singapore Shariah Index. Furthermore Syfe, a digital wealth management company, also added AA REIT to its REIT+ portfolio, which tracks the iEdge S-REIT Leaders index by the Singapore Exchange (SGX).
Website: Syfe drops SPH REIT from REIT+ portfolio, adds Lendlease and AIMS APAC
For existing holders, this signifies higher trading liquidity and visibility among global institutional investors, helping to diversify the investor base and maximize value creation over the long term.
Possible Expansion Targets
Potential pivot to data centre
AA REIT’s modest gearing could also present possible opportunities for it to redevelop older industrial assets into higher-value projects like data centers and make more earnings-accretive acquisitions in Singapore and Australia. This would put them into the same playing field with giants such as Ascendas REIT or Mapletree Industrial Trust.
However, currently the above have been merely hinted and not concrete as at the time of writing. Will need to wait for further announcements from AA REIT to determine if this is the path they want to take.
Key Things to Note
Covid-19 Restrictions
While Singapore currently is managing the virus well, the same cannot be said for our neighbors and other parts of the world. Singapore is a small country that is heavily dependent trades with other countries, which have been severely disrupted due to Covid-19. A simple illustration would be the ongoing negotiations with Hong Kong for a travel bubble, which till now is unable to be implemented given that there have been uncertainty revolving around the virus.
Majority of AA REIT’s properties are located in Singapore, and 97% of the revenue is derived from Singapore based on their FY2021 annual report. Thus we are reliant on the performance of Singapore in maintaining the relationships with overseas countries in ensuring the tenants under AA REIT properties are able to survive.
The Weighted Average Lease Expiry (“WALE”) as at 31 March 2021 is 3.95 years, thus AA REIT is shielded in the short term from any disruptions to the operations and income. However, a prolonged Covid-19 and lockdown may result in potential loss of income in the future if Singapore is no longer seen as an attractive investment.
Summary
A pivot towards data center could potentially see AA REIT being valued similarly to other giants such as Ascendas REIT or Mapletree Industrial Trust, with P/B ratios of 1.3 and 1.6 respectively. Assuming net asset value per share of SGD1.36 as at 31 March 2021, this represents potential capital gains upside as a P/B ratio of 1.3 times will result in a share price of SGD 1.76, a 10% increase from the share price as at 16 July 2021. At SGD 1.76, the dividend yield would be approximately 4.8%, which would still be fairly decent.
In view of the above, AA REIT is a good investment that investors could consider for stable dividend yield. It is worth noting though that the recent run up may have ran out of steam and there is a potential pullback in share price, which may represent better entry points.
