AIMS APAC REIT (“AA REIT”) earlier during the year have announced their full year result for FY2022. The results have shown improvement. The share price have stabilized around pre-Covid-19 levels, although it has dropped from SGD1.43 when I last visited as at 28 December 2021 to SGD1.37 based on closing price as at 8 July 2022. Whilst it is not a significant change, 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 2022:
Their tenant base are leaning more towards the Logistic (30.3%), Supermarket/Retail (16.1%), Telecommunication (12.2%), and Engineering (9.6%). 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 ventured into a new exposure towards the supermarket/retail industry for the second half of the year, resulting in an overall decrease in weightage in the other sectors. The result was a significant fall in share price from its recent highs to pre-Covid-19 levels, as the market now no longer price them as a logistic play but one that is more diversified. Nonetheless, in my view this diversification is a welcome one, and the supermarket/retail industry being an essential service one may proof to be resilient with the upcoming recession.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 27 April 2022, it was noted that DPU for FY2022 have increased by 5.7% to SGD0.0946 from SGD0.0895 in the prior year. The increase was mainly contributed by
- The recent acquisition of Woolworths HQ in November 2021
- Full year contribution from 7 Bulim Street acquired in October 2020
- Higher rental and recoveries for other properties
This metric is Favorable as the DPU growth is more or less organic.
Occupancy
Occupancy rate as at 31 March 2022 stands at 97.6%. This is also an improvement from 30 September 2021, which stood at 97.3%. 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 37.5% as at 31 March 2022. This is a significant increase from 24.7% as at 30 September 2021. The reason being was mainly due to additional loan drawn down for the acquisition of Woolworths HQ. As of now, this to me is considered Favorable as there is more than sufficient headroom from the MAS limit of 50% to fund new acquisitions through debt.
Interest coverage
The interest coverage for the trailing 12 months stands at 5.1 times. This is an improvement from 4.5 times as at 30 September 2021. However the overall metric is Neutral as the interest coverage is closer to my preference of 5.0 times and with interest rates forecasted to increase in the near future, it may turn unfavorable over the next few months.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.3 years as at 31 March 2022. 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 0.978. This is computed using the closing share price of SGD 1.37 on 8 July 2022 and the net asset value per share of SGD1.40 as at 31 March 2022. The P/B ratio is Favorable.
Dividend yield
At 8 July 2022, with a closing share price of SGD1.37 and dividend payout of SGD0.097 for the full calendar year 2021, this translates to a dividend yield of 7.08%.
The dividend yield is Favorable. The exposure of this REIT is to industrial and supermarket/retail properties which tend to be more resilient to Covid-19. Thus is sustainable and represents a good recurring income for investors.
Key Things to Note
Interest rate hikes
The Federal Reserve have been hiking interest rates aggressively, with the latest being a 75 basis points on 15 June 2022. Singapore, being heavily intertwined with the global economy, is likely to continue increase interest rates as well.
As a REIT, AA REIT is heavily reliant on borrowings to fund their acquisitions, as seen by their gearing ratio of 37.5%. Although their debt maturity profile stands at 3.3 years which indicates the unlikely need to refinance soon, a pro-longed inflation may see interest rates hiked further and remain at high rates for years to come. Moving forward, any new debts taken by AA REIT can be expected to be of higher rates than their current borrowings. This will affect their bottom line as more interest expenses will need to be paid, and an increase in interest expenses will significantly affect their interest coverage ratio.
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 have made a venture into the supermarket/retail industry, which is a new industry for AA REIT and investors may not like the diversification.
Tenant Concentration
With the new addition of Woolworths which contributes to 16.1% of the total revenue, AA REIT now has the top 10 tenants contributes to 55.2% of the total revenue. Although based on the latest financial results the Woolworths Group is generating profits and cash flows and are unlikely to default on rent, AA REIT is now heavily reliant on a few customers for income. The tenant concentration is something investors should take note of.
Summary
Overall, AA REIT is still a Favorable investment for those who are looking to add for dividend. The recent stabilization at pre-Covid-19 levels form a good floor for the share price. Especially as it is trading close to its net asset value per share.
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.
