AIMS APAC REIT (SGX: O5RU): 2023 Third Quarter Business Update

On 25 January 2023, AIMS APAC REIT (“AA REIT”) have announced their third quarter business update for FY2023. The results have shown improvement, and I have liked that they have increased the diversification of their tenant base.

However, I have changed my analysis of the interest coverage to use the adjusted interest coverage that was provided by management. The reason is because it includes the amount reserved for distribution to Perpetual Securities holders, which has higher priority than distribution to unitholders. Something that I believe investors should take note of as their dividend may be affected to satisfy the needs of the lenders.

Website: General Announcement::Aims Apac REIT – Third Quarter FY2023 Business Update


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”)

MetricsCurrentPrevious
Distribution Per Unit+2.7%+0.9%

Based on the announcement on 25 January 2023, it was noted that DPU for the 9 months ending 31 December 2022 have increased by 2.7% to SGD0.0729 from SGD0.0710 in the 9 months ending 31 December 2021.

The reason for the relatively flat increase between the 9 months results despite a 10.2% increase for 2023Q3 as compared to 2022Q3 was due to there was a reversal of rental relief provision in the previous financial year which increased the 2022H1 DPU. The DPU for 2023Q3 also improved as compared to 2022Q3 due to full contributions from the recent acquisition of Woolworths HQ in November 2021.

This metric is Favorable as the DPU growth is organic.

Occupancy

MetricsCurrentPrevious
Occupancy97.8%97.5%

Occupancy rate as at 31 December 2022 stands at 97.8%. 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.

Gearing ratio

MetricsCurrentPrevious
Gearing Ratio36.4%36.5%

Gearing ratio stands at 36.4% as at 31 December 2022, relatively unchanged from the previous quarter. This metric is Favorable as there is more than sufficient headroom from the MAS limit of 50% to fund new acquisitions through debt.

Interest coverage

MetricsCurrentPrevious
Interest Coverage2.3x2.5x

I have amended my analysis of the interest coverage to use the adjusted interest coverage that was provided by management. The reason is because it includes the amount reserved for distribution to Perpetual Securities holders. Although Perpetual Securities holders are a form of equity, there is a higher priority to pay them their interest due before it is distributed to the common shareholders. Thus we have to ensure there is sufficient interest coverage to satisfy their needs as well.

The adjusted interest coverage for the trailing 12 months stands at 2.3 times. This is a decrease from 2.5 times as at 30 September 2022.

The overall metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and may worsen. The Federal Reserve has hiked interest rates to 4.25% recently, and is expecting another quarter-point increase next month bringing the rate to a range between 4.5% and 4.75%.

Website: Fed Sets Course for Milder Interest-Rate Rise in February

The sensitivity analysis using the information as at 31 December 2022:

DescriptionAmount (SGD’000)
Total Debt$805,200
Debt Not Hedged (%)12%
Debt at Floating Rate Exposed$96,624
Distributable Income FY2022$104,108

Interest rate sensitivity analysis as below:

Change in Interest RatesDecrease in Distributable Income (SGD’000)Change as % of FY2022 Distribution
+ 50 bps-$483-0.5%
+ 100 bps-$966-0.9%
+ 150 bps-$1,449-1.4%
+ 200 bps-$1,932-1.9%
+ 250 bps-$2,416-2.3%
+ 300 bps-$2,899-2.8%

Do note the above is my estimation which may be different from management’s estimation. It is beneficial to know that AA REIT have a significant portion of 88.0% of their debt hedge on fixed rates inclusive of forward interest rate swaps. They are thus unlikely to have any significant impact on interest rate changes based on the sensitivity analysis. However, their lower interest coverage ratio may be an issue as there are other factors which may affect their earnings.

Debt maturity profile

MetricsCurrentPrevious
Debt Maturity Profile3.2 years3.5 years

Weighted average term to maturity of their debt stands at 3.2 years as at 31 December 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

MetricsCurrentPrevious
Price to Book Ratio1.001.20

The Price to Book (“P/B”) ratio currently stands at 1.00. This is computed using the closing share price of SGD 1.38 on 27 January 2023 and the net asset value per share of the same SGD1.38 as at 31 December 2022. The P/B ratio is Favorable as you are paying for its book-value.


Dividend yield

YearYieldTotal
20231.88%SGD 0.026
20226.82%SGD 0.094
20217.03%SGD 0.097
20206.16%SGD 0.085
20197.43%SGD 0.103
20186.04%SGD 0.083
20179.07%SGD 0.125
20166.05%SGD 0.113
20158.19%SGD 0.113
20147.68%SGD 0.106
20137.95%SGD 0.110
20127.46%SGD 0.103
Extracted from Dividends.sg

At 27 January 2023, with a closing share price of SGD1.38 and dividend payout of SGD0.094 for the full calendar year 2022, this translates to a dividend yield of 6.82%. The dividend yield is Favorable. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment, and AA REIT have been fairly consistent throughout the years.

Website: Reasonable Dividend Yield 2023Q1

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, such as AA REIT with their significant Perpetual Securities. If using dividend yield of 7.5% as a benchmark, based on the dividend of SGD0.094 there is potential for AA REIT to see its share price drop by another 9.2% to SGD1.25. Investors will thus need to be mentally prepared that the share price might further fall.

YieldShare PriceDownside
Current (6.82%)1.38
7.50%1.25-9.2%
8.50%1.11-19.9%
9.50%0.99-28.3%

It is worth noting that interest for long-term safe assets are on a downtrend. The February 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.97%, which is lower than the previous few months. There is a chance with the continued decrease interest rates, the required dividend yield of investor required may not be as high as before.

Website: SBFEB23 GX23020X Bond Details

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 14.8% of the total revenue. AA REIT now has the top 10 tenants contributes to 52.5% 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.

Since 30 September 2022, their tenant base have been increasingly diversified, with a reduction of the 3 main trade sectors of Logistic (25.6%), Food & Consumer Staples (19.1%) and Data Centre & Telecommunication (14.6%). The rest of the industries individually are below 10% of their 2023Q3 Gross Rental Income. The diversification is a welcome one to reduce reliance on any specific sector. Refer to the the breakdown below.


Summary

MetricsFinancialsRating
Distribution Per Unit+2.7%Favorable
Occupancy97.8%Favorable
Gearing Ratio36.4%Favorable
Interest Coverage2.3xUnfavorable
Debt Maturity Profile3.2 yearsFavorable
Price to Book Ratio1.00Favorable
OverallFavorable

Overall, the metrics indicate that it is favorable to invest in AA REIT. The fundamentals of AA REIT has been stable throughout the years which is a good investment that investors could consider for stable dividend yield. The current share price will be seen as undervalued with a strong support as it is trading around its net asset value.

However, investors will need to gain comfort over their lower interest coverage. Compared to other REITs, AA REIT has a higher possibility of cutting DPU to satisfy their lenders.

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


Previous Post

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


2 thoughts on “AIMS APAC REIT (SGX: O5RU): 2023 Third Quarter Business Update

  1. Dear Vires
    Thanks once again for this very clear evaluation of AA REIT
    I have held this for a few years and added to my holdings recently
    The smaller market cap of this well run reit makes it also a potential target for acquisition
    Total shareholder returns have been good although recent rate related fall in unit price might linger longer until the rate cycle starts turning
    Best wishes
    Garudadri

    1. Thank you for reading. Yes it is a potential target. Previously there was a rumor ESR REIT was interested. Will not be surprise if it really happens.

Comments are closed.