On 3 November 2023, AIMS APAC REIT (“AA REIT”) have announced their half year result for FY2024. There has been no significant changes to the financial position of AA REIT this quarter. Their Interest coverage continues to remain deep in unfavorable territory and is something that management and investors should take note of.
Website: Financial Statements And Related Announcement::Half 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 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 | -1.1% | +1.3% |
DPU for the first half of FY2024 decreased by 1.1% to SGD0.0465 from SGD0.0470 in the same period of the previous financial year. The reason for the decrease was due to an enlarged unit base following the Equity Fund Raising (“EFR”) launched on 31 May 2023 where 57,660,000 units were issued on 12 June 2023 in relation to the Private Placement and 25,376,361 units were issued on 3 July 2023 in relation to the Preferential Offering.
This metric is Neutral as although DPU have decreased, keep in mind that the applicable number of units have increased by 12.8% which is more than proportionate. Net property income has increased by 5.1% which helps to cushion the DPU decrease.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.1% | 98.1% |
Occupancy rate as at 30 September 2023 remains unchanged 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 | 32.1% | 32.9% |
Gearing ratio stands at 32.1% as at 30 September 2023. 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 | 2.2x |
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, 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 7 November 2023 have indicated that interest rates need to stay high for a longer period of time and higher interest rates may be needed. This was after having increased the interest rates to a range between 5.25% and 5.50% on 26 July 2023, the highest level in 22 years.
Website: US Fed official expects further rate hike needed
The sensitivity analysis using the information as at 30 September 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $688,000 |
| Debt Not Hedged (%) | 23% |
| Debt at Floating Rate Exposed | $158,240 |
| 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 | -$791 | -1.1% |
| + 100 bps | -$1,582 | -2.2% |
| + 150 bps | -$2,374 | -3.3% |
| + 200 bps | -$3,165 | -4.4% |
| + 250 bps | -$3,956 | -5.5% |
| + 300 bps | -$4,747 | -6.6% |
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
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.8 years | 3.0 years |
Weighted average term to maturity of their debt stands at 2.8 years as at 30 September 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 | 0.94 | 0.92 |
The Price to Book (“P/B”) ratio currently stands at 0.94. This is computed using the closing share price of SGD1.27 on 1 December 2023 and the net asset value per share of the same SGD1.35 as at 30 September 2023. The P/B ratio is Favorable as you are paying for its book-value.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 7.79% | SGD 0.099 |
| 2022 | 7.41% | SGD 0.094 |
| 2021 | 7.64% | SGD 0.097 |
| 2020 | 6.69% | SGD 0.085 |
| 2019 | 8.07% | SGD 0.103 |
| 2018 | 6.01% | SGD 0.083 |
At 1 December 2023, with a closing share price of SGD1.27 and dividend payout of SGD0.099 for the full calendar year 2023, this translates to a dividend yield of 7.79%. The dividend yield is Favorable. For my 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.
Website: Reasonable Dividend Yield 2023Q4
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 13.9% 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 51.5% 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 | -1.1% | Neutral |
| Occupancy | 98.1% | Favorable |
| Gearing Ratio | 32.1% | Favorable |
| Interest Coverage | 2.2x | Unfavorable |
| Debt Maturity Profile | 2.8 years | Favorable |
| Price to Book Ratio | 0.94 | Favorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in AA REIT. The fundamentals of AA REIT has become more stable over the last few quarters and is well positioned to navigate through any uncertainties. 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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