AIMS APAC REIT (“AA REIT”) recently announced their half year result for 1H FY2022. While the results are decent, it also announced other qualitative factors throughout the period, which includes changes in management. For a stock that I deemed for boring dividends, this is a substantial change.
In response, the market does not seem to take it too kindly, with the share price dropping from SGD 1.58 when I last visited as at 16 July 2021 to SGD 1.43 based on closing price as at 28 December 2021. This represents a decrease of 9.49% which is significant. I will be having a closer look at their results in this post.
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 (35.7%), Telecommunication (14.7%), and Engineering (11.9%). The rest of the industries individually are below 10% of their 2Q FY2022 Gross Rental Income. Refer to the the breakdown below.
It was worth noting that they have an increasing exposure towards the logistics industry for this half of the year, with an increase to 35.7% as at September 2021 from 34.8% in March 2021. In view of the impacts of Coivid-19, logistics is one of the more resilient industries, and this is a welcome increase.
Their revenue is also not concentrated on any single key tenant. The top tenant contributes 14.1% of revenue and the top 10 tenants contributes to 48.6% of the total revenue.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 13 October 2021, it was noted that gross revenue for 1H FY2022 have increased by 13.0% to SGD 65 million from SGD 57 million as compared to the same period in the prior year and DPU have increased by 18.8% to SGD 0.0475 from SGD 0.0400 respectively.
It was worth noting that the significant increase was due to the low base in 1H FY2021 with the effects of Covid-19. I looked at 1H FY2020 and noted that their gross revenue was SGD 61 million with a DPU of SGD 0.0500, which demonstrates that their 1H FY2022 is relatively consistent with pre-Covid results. Thus this metric is Favorable.
Occupancy
Occupancy rate as at 30 September 2021 stands at 97.3%. This is also an improvement from 31 March 2021, which stood at 95.4%. 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.
Gearing ratio
Gearing ratio stands at 24.7% as at 30 September 2021. This is a significant decrease from 33.9% as at 31 March 2021. The reason being was the $250.0 million perpetual securities issued on 1 September 2021, which are classified as equity and was also used to pay down their debt. This significantly bolstered their equity and lowered their debt in the statements of financial position.
This to me is considered Favorable as it means there is more than sufficient headroom from the MAS limit of 50% to fund new acquisitions through debt, which are deemed as quick financing to capitalise on any opportunities within the short term. It also 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 4.5 times. This is Unfavorable in my opinion. However as AA REIT have recently paid down significant debt and the interest rate hikes will not be expected to significantly increase within the financial year, 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 2.1 years as at 30 September 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 1.02. This is computed using the closing share price of SGD 1.43 on 28 December 2021 and the net asset value per share of SGD1.40 as at 30 September 2021. The P/B ratio is Favorable.
Dividend yield
At 28 December 2021, with a closing share price of SGD1.43 and dividend payout of SGD0.097 for the full calendar year 2021, this translates to a dividend yield of 6.78%.
The dividend yield is Favorable. Given that the exposure of this REIT is to industrial properties which tend to be more resilient to Covid-19, thus is sustainable, which represents a good recurring income for investors.
Possible Expansion Targets
Potential pivot to data centre
AA REIT have recently completed their acquisition of the 1 Woolworths Way, Bella Vista, New South Wales, Australia property on 15 November 2021. Do note that this is a business park property that is well connected to all the major public transport motorways and networks, providing direct access to the Sydney Central Business District and all logistics and distribution precincts in metropolitan Sydney. This will strengthen AA REIT’s foothold in Sydney’s resilient business park market with access to a strategic business park and data centre location.
With AA REIT’s modest gearing, this could present possible opportunities for it to make more earnings-accretive acquisitions in Singapore and Australia. Another alternative would be to redevelop older industrial assets into higher-value projects like data centers. This would put them into the same playing field with giants such as Ascendas REIT or Mapletree Industrial Trust.
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. The disruptions have directly seen a continuous rise in costs, with inflation set to increase significantly as US saw their biggest inflation surge in more than 30 years, with consumer prices increased by 6.2%.
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. It is only a matter of time before inflation catch up to our shores and affect our tenants.
The Weighted Average Lease Expiry (“WALE”) as at 30 September 2021 is 3.98 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.
Change in Management
It was worth noting that there were a couple of high profile changes to AA REIT’s management team in September 2021.
While no issues were noted in their resignations, it will be worth keeping a close watch to see if there are any changes to the REIT’s mandates and operations by the new management team. For instance, AA REIT may transition from being a “boring dividend counter” to one that takes on more risk. As investors, we will need to see if AA REIT fits our risk appetite.
Summary
Overall, AA REIT is still a Favorable investment for those who are looking to add for dividend. The recent pull back in share price from SGD 1.58 as at 16 July 2021 may be due to the recent changes in management, which adds to uncertainty of the direction AA REIT may be taking or if there are any issues to be highlighted.
However, 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, and based on the latest acquisition, it does seem that management is inclined to enter the data centre market.
In view of this, AA REIT is a good investment that investors could consider for stable dividend yield as the current share price will be seen as undervalued with a strong support as it is trading close to its net asset value.
