AIMS APAC REIT (SGX: O5RU): 2023 Half Year Result

On 26 October 2022, AIMS APAC REIT (“AA REIT”) have announced their half year result for FY2023. The results have shown slight improvement, though we are seeing the effects of their high borrowings starting to lower their interest coverage. As it is a relatively low profile stock, the share price have not changed significantly since the announcement date.

Website: Financial Statements and Related Announcement::Second Quarter and/or Half Yearly Results


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, including warehousing and distribution activities, business park activities and manufacturing activities.

The Trust’s portfolio consists of 2 business parks and 26 industrial properties, 25 of which are located in Singapore. It also holds an interest in Optus Centre, which is located in Macquarie Park, New South Wales, Australia.

The Trust is managed by AIMS AMP Capital Industrial REIT Management Limited.


Key Metrics

Distribution Per Unit (“DPU”)

Based on the announcement on 26 October 2022, it was noted that DPU for the first half of 2023 have decreased by 1.1% to SGD0.0470 from SGD0.0475 in the first half of 2022. Noted however that the decrease was due to there was a reversal of rental relief provision in 2022. Excluding the one-off reversal DPU have increased by 0.9%. The increase in DPU was due to contributions from the recent acquisition of Woolworths HQ in November 2021.

This metric is Favorable as the DPU growth is organic.

Occupancy

Occupancy rate as at 30 September 2022 stands at 97.5%. 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 36.5% as at 30 September 2022. It is worth noting that the gearing is lowered due to translation loss from the Australian denominated borrowings as a result of AUD weakening against SGD. 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 4.6 times. This is a decrease from 5.1 times as at 31 March 2022 and the reason is due to the interest from borrowings to fund the acquisition of Woolworths HQ and increase in the floating interest rates.

This is not surprising given that the perpetual securities were issued at an interest rate of 5.375%, which is significantly higher than their blended debt funding cost of 3.0%. Interest rates may easily rise as the world looks to tackle inflation, as the Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to at least 4.75% by end of 2022.

Website: Fed to lift rates by 50 basis points, but peak policy rate may be higher

The overall metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and may worsen.

As the interest rate may potentially increase further, AA REIT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 88.0% of their debt is also on fixed rates inclusive of forward interest rate swaps.

I have thus performed a sensitivity analysis using the information as at 30 September 2022:

Interest rate sensitivity analysis as below:

Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, AA REIT may experience a fall in DPU accordingly.

Debt maturity profile

Weighted average term to maturity of their debt stands at 3.5 years as at 30 September 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due or wait for interest rates to decrease.

Price to Book Ratio

The Price to Book (“P/B”) ratio currently stands at 0.91. This is computed using the closing share price of SGD 1.27 on 18 November 2022 and the net asset value per share of SGD1.40 as at 30 September 2022. The P/B ratio is Favorable.


Dividend yield

At 18 November 2022, with a closing share price of SGD1.27 and dividend payout of SGD0.094 for the full calendar year 2022, this translates to a dividend yield of 7.41%. The dividend yield is Favorable. For my REIT’s benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment, and AA REIT have been fairly consistent throughout the years.

However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%, causing the previous yields of AA REIT to become unfavorable. AA REIT saw a decrease in their share price from SGD1.37 in my last article on 12 July 2022 to SGD1.27 on 18 November 2022 to provide higher dividend yields.

Website: Reasonable Dividend Yield Changes

Unlike the other REITs with popular and larger managers, investors historically require AA REIT to provide a higher dividend yield to compensate for potential risks, especially as interest rates for safe assets in Singapore approaches to cross 4%. If using dividend yield of 8% as a benchmark, based on the dividend of SGD0.094 there is potential for AA REIT to see its share price drop by another 7.5% to SGD1.18. Investors will thus need to be mentally prepared that the share price might further fall.

The dividend yield is Neutral.


Key Things to Note

Tenant Concentration

It was worth noting that they have an ventured into a new exposure towards the supermarket/retail industry in the prior year, with the new addition of Woolworths which contributes to 15.7% of the total revenue. AA REIT now has the top 10 tenants contributes to 53.9% 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.

With the addition of Woolworths, their tenant base are leaning more towards the Logistic (30.9%), Supermarket/Retail (15.7%), Telecommunication (11.9%), and Engineering (10.5%). The rest of the industries individually are below 10% of their 2023Q2 Gross Rental Income. Refer to the the breakdown below.

This resulted in an overall decrease in weightage in the other sectors. During Covid-19, there were speculations that the REIT may diversify into data centers causing its share price to reach SGD1.60 in August 2021 and September 2021. Since then the share price have fallen as the market now no longer price them as a data center or 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.


Summary

Overall, the metrics indicate that it is favorable to invest in AA REIT. Despite the drop in share price over the last few months, the fundamentals of AA REIT did not worsen significantly during this financial year. This suggests that the current share price is due to overall market sentiment, especially as safe assets have seen their yield rise considerably with rising interest rates.

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 below its net asset value.

Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.


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Website: AIMS APAC REIT (SGX: O5RU): 2022 Full Year Result, Changes to the Business


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