AA REIT’s operational performance strongest among S-REITs under RHB’s coverage

RHB Bank Singapore pleased with AA REIT, keeps "buy", cites strong occupancy improvement amongst other reasons.

RHB Bank Singapore analyst Vijay Natarajan is keeping “buy” on AIMS APAC REIT (AA REIT) O5RU at a reduced target price of $1.47 from $1.55, citing the REIT’s strong operational performance amongst S-REITs under his coverage with steady occupancy improvement and strong double digit rent reversions which are expected to continue.

In his Aug 21 report, the analyst notes that post recent pre-emptive fundraising, the REIT’s balance sheet remains “healthy” with a low gearing and high debt hedge with no refinancing needs until FY2025 ending March 2025. Valuation is attractive and is trading at a discount of around 10% to book value.

AA REIT looks to unlock value via asset enhancement initiative (AEI), recently announcing that it will embark on two yield accretive AEIs later this year.

The first project involves the significant upgradation of an existing logistic asset to a prime logistic facility which is in greater demand and commands significantly higher rent. The second AEI involves the repositioning of an existing high specification industrial asset that is expected to result in a 30% rent uplift. The AEIs are expected to cost $32 million with a targeted return on investment or return of investment (ROI) of 7% to 8%.

Moreover, the REIT is also evaluating the redevelopment of an industrial asset that is situated in the JTC Food Zone in Singapore that could result in a 90% uplift to existing gross fixed asset (GFA).

“Amid the current challenging acquisition landscape, we like AA REIT’s value unlocking strategy of repositioning its existing assets. While the above AEIs and funding will be a short-term drag on earnings, we see a good upside over the medium to long term,” writes the analyst.

Meanwhile, Natarajan notes that strong operational performance is likely to continue.

Rent reversion in the first quarter continued to demonstrate the significant under-rented nature, particularly its logistics assets with a 38% increase (4QFY2023: +36.8%). The strong double-digit rent reversion is expected to continue in FY2024, with 85% of the total lease expiries (15.6%) coming from its logistic assets. Portfolio occupancy has also been on a steady uptrend and currently stands at 98.1% (FY2023: 98%).

Moving forward, the REIT seems to be in a comfortable gearing level of 32.9% post fund raising. This presents it with the room for selective acquisitions. Already, management has used $65 million of the $100 million fund raising proceeds to repay its debt in the interim, of which 87% is fixed with an average tenure of about 1.9 years. There is no loan due for refinancing next year.

On the foreign exchange front (FX), the REIT has also hedged 69% of its Australian Dollar income on a rolling four-quarter basis via forward currency contracts.

“Valuation wise, we expect a slight increase in value for Singapore assets from strong rent growth offsetting a likely small decline in Australia,” he writes.

Notably, the analyst has lowered his FY2023 to FY2024 distribution per unit (DPU) estimates by 4% to 5%, attributing it to the short-term drag from downtime for asset enhancements and enlarged unit base leading to his lowered target price.

As at 11.25am, units in AA REIT are trading at one cent lower or 0.81% down at $1.22 on Aug 23.

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