On 5 May 2023, AIMS APAC REIT (“AA REIT”) have announced their full year result for FY2023. The results have shown stability, and thus the recent drop in share price is likely due to the upcoming rights issue and advanced distribution that is to be paid out in June 2023.
According to the announcement, the upcoming rights issue are to fund any asset enhancement initiatives (“AEIs”), re-developments of the properties owned by AA REIT and potential acquisitions, as well as pare down AA REIT’s existing debt to keep AA REIT’s aggregate leverage within the desired range. Considering their already expensive debt, I believe this is a good idea to reduce any financing costs and in the longer term, benefit unitholders.
Website: Financial Statements And Related Announcement::Full Yearly Results
Photo source: https://www.aimsapacreit.com/
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”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | +5.1% | +2.7% |
Based on the announcement on 5 May 2023, it was noted that DPU for the full year have increased by 5.1% to SGD0.0994 from SGD0.0946 the previous financial year. The reason for the increase was largely due to full year revenue contribution from the acquisition of Woolworths HQ and higher rental and recoveries from AA REIT’s logistics and warehouse, hi-tech and industrial properties.
This metric is Favorable as the DPU growth is organic.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.0% | 97.8% |
Occupancy rate as at 31 March 2023 stands at 98.0%. 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
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 36.1% | 36.4% |
Gearing ratio stands at 36.1% as at 31 March 2023, 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
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 2.3x | 2.3x |
My analysis uses 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. Relatively unchanged from the previous quarter.
The overall metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and may worsen. The Federal Reserve on 3 May 2023 has hiked the interest rates to a range between 5.00% and 5.25%, the highest level in 15 years and are likely to keep it at these levels over the next few years.
Website: US Fed raises interest rates again, signals potential pause in tightening cycle
The sensitivity analysis using the information as at 31 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $796,000 |
| Debt Not Hedged (%) | 12% |
| Debt at Floating Rate Exposed | $95,520 |
| Distributions to Unit Holders FY2023 | $71,623 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributions (SGD’000) | Change as % of FY2023 Distribution |
|---|---|---|
| + 50 bps | -$478 | -0.7% |
| + 100 bps | -$955 | -1.3% |
| + 150 bps | -$1,433 | -2.0% |
| + 200 bps | -$1,910 | -2.7% |
| + 250 bps | -$2,388 | -3.3% |
| + 300 bps | -$2,866 | -4.0% |
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
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.1 years | 3.2 years |
Weighted average term to maturity of their debt stands at 3.1 years as at 31 March 2023. 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
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.88 | 1.00 |
The Price to Book (“P/B”) ratio currently stands at 0.88. This is computed using the closing share price of SGD 1.21 on 9 June 2023 and the net asset value per share of the same SGD1.37 as at 31 March 2023. The P/B ratio is Favorable as you are paying for its book-value.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 5.82% | SGD 0.070 |
| 2022 | 7.78% | SGD 0.094 |
| 2021 | 8.02% | SGD 0.097 |
| 2020 | 7.02% | SGD 0.085 |
| 2019 | 8.47% | SGD 0.103 |
| 2018 | 6.89% | SGD 0.083 |
For 2023, there is currently an advance distribution in June 2023 due to the upcoming rights issue. Therefore we will use the 2022 dividend yield as a benchmark.
At 9 June 2023, with a closing share price of SGD1.21 and dividend payout of SGD0.094 for the full calendar year 2022, this translates to a dividend yield of 7.78%. The dividend yield is Favorable, though it may be worth keeping in mind that the high yield is due to the lowered share price for the upcoming rights issue. 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 2023Q2
It is worth noting that interest for long-term safe assets have stabilized and is on a downtrend. The July 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.82%. There is a chance for interest rates may not increase significantly moving forward, and the required dividend yield of investor may be lower than current.
Website: SBJUL23 GX23070H Bond Details
Key Things to Note
Tenant Concentration
It was worth noting that they have an ventured into a new exposure towards the supermarket/retail industry, with the new addition of Woolworths which contributes to 15.3% of the total revenue. AA REIT now has the top 10 tenants contributes to 53.0% 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
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | +5.1% | Favorable |
| Occupancy | 98.0% | Favorable |
| Gearing Ratio | 36.1% | Favorable |
| Interest Coverage | 2.3x | Unfavorable |
| Debt Maturity Profile | 3.1 years | Favorable |
| Price to Book Ratio | 0.88 | Favorable |
| Overall | | Favorable |
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 drop due to the rights issue can be seen as undervalued with a strong support as it is trading below its net asset value. However, investors should take note that the share price may fall further when the rights shares are issued.
Investors will also 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.
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