On 27 July 2023, AIMS APAC REIT (“AA REIT”) have announced their first quarter business update for FY2024. With the recent equity fund raising, AA REIT have paid off a signficant portion of their borrowings and reduced their gearing. This helps with improving the fundamentals and benefit unitholders in the longer term, especially as interest rates are set to continue increasing over the next few quarters.
Interest coverage is likely to remain unfavorable for an extended period of time. It may improve over the next few quarters with the lower finance costs from the reduced gearing.
Website: General Announcement::AIMS APAC REIT – First Quarter FY2024 Business Update
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 business parks and industrial properties.
The Trust is managed by AIMS AMP Capital Industrial REIT Management Limited.
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | +1.3% | +5.1% |
DPU for the first quarter of FY2024 have increased by 1.3% to SGD0.0231 from SGD0.0228 in the same period of the previous financial year. This metric is Favorable as the DPU growth is organic.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.1% | 98.0% |
Occupancy rate as at 30 June 2023 stands at 98.1%. 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 | 32.9% | 36.1% |
Gearing ratio stands at 32.9% as at 30 June 2023, the significant reduction due to the equity fund raising this quarter where the proceeds were partially used to repay debts. 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 | 2.2x | 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 2.2 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 26 July 2023 has once again hiked the interest rates by a quarter percentage point to a range between 5.00% and 5.25%, the highest level in 22 years and are likely to keep it at these levels over the next few years.
Website: Fed approves hike that takes interest rates to highest level in more than 22 years
The sensitivity analysis using the information as at 30 June 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $736,000 |
| Debt Not Hedged (%) | 13% |
| Debt at Floating Rate Exposed | $95,680 |
| 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 | -$957 | -1.3% |
| + 150 bps | -$1,435 | -2.0% |
| + 200 bps | -$1,914 | -2.7% |
| + 250 bps | -$2,392 | -3.3% |
| + 300 bps | -$2,870 | -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 87.0% 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 | 3.0 years | 3.1 years |
Weighted average term to maturity of their debt stands at 3.0 years as at 30 June 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 | 0.92 | 0.88 |
The Price to Book (“P/B”) ratio currently stands at 0.92. This is computed using the closing share price of SGD1.23 on 23 August 2023 and the net asset value per share of the same SGD1.34 as at 30 June 2023. The P/B ratio is Favorable as you are paying for its book-value.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 6.14% | SGD 0.076 |
| 2022 | 7.65% | SGD 0.094 |
| 2021 | 7.89% | SGD 0.097 |
| 2020 | 6.91% | SGD 0.085 |
| 2019 | 8.33% | SGD 0.103 |
| 2018 | 6.78% | SGD 0.083 |
At 23 August 2023, with a closing share price of SGD1.23 and dividend payout of SGD0.094 for the full calendar year 2022, this translates to a dividend yield of 7.65%. The dividend yield is Favorable, though it may be worth keeping in mind that the high yield is due to the lowered share price from the recent equity fund raising. 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 2023Q3
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 Woolworths which contributes to 14.3% of the total revenue. Although AA REIT is continuously increasing the customer base and reducing reliance on the top 10 tenants, AA REIT now has the top 10 tenants contributing to 51.8% of the total revenue. 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.
Website: https://www.woolworthsgroup.com.au/
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | +1.3% | Favorable |
| Occupancy | 98.1% | Favorable |
| Gearing Ratio | 32.9% | Favorable |
| Interest Coverage | 2.2x | Unfavorable |
| Debt Maturity Profile | 3.0 years | Favorable |
| Price to Book Ratio | 0.92 | Favorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in AA REIT. With the equity fund raising and lowered gearing, the fundamentals of AA REIT has become more stable and is a good investment that investors could consider for stable dividend yield. Investors will however 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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Website: AIMS APAC REIT (SGX: O5RU): 2023 Full Year Result
