Analysts remain positive on AA REIT for attractive yields despite headwinds
SINGAPORE (Apr 25): Despite negative reversions likely to persist in the near term, analysts are positive on AIMS APAC REIT (AA REIT) on the back of expected distribution per unit (DPU) yields of 7.2% to 7.3% over FY20-21F.
Both Maybank Kim Eng Research and DBS Group Research are keeping their “buy” calls on AIMS APAC REIT (AA REIT), with a similar target price of $1.50.
“We expect negative reversions to persist in the near term from the earlier 2014-17 supply surge. Accordingly, we cut DPUs by 3-4% on slower rental growth assumptions,” says Maybank analyst Chua Su Tye in a Thursday report.
Despite the lower DPU forecasts, Chua believes a DPU recovery is underway.
“[This is] supported by its first greenfield build-to-suit (BTS), while redevelopment growth optionality from its under-utilised gross floor area (GFA) offers 4-5% potential upside,” Chua says.
AA REIT on Wednesday announced a DPU of 4Q19 of 2.75 cents, 4.6% higher than the 2.75 cents declared in 4Q18. This brings FY19 DPU to 10.25 cents, a slight 0.5% lower than 10.30 cents recorded in FY18.
See: AA REIT declares 4.6% increase in 4Q DPU to 2.75 cents
“Supported by master leases with built-in rental escalations, AA REIT offers investors a higher degree of income certainty ahead of the sector’s anticipated recovery in 2020 with attractive dividend yields of close to 7.3% per annum over FY20F-21F,” says DBS lead analyst Carmen Tay in a Thursday report.
Like Chua, Tay sees great potential in AA REIT’s close to 600,000 sq ft of untapped gross floor area – one of the highest among its peers.
“Given the prime location of selected properties, we believe that the manager can potentially redevelop these sites into future-proof assets such as data centres and estimate that the unlocking of unutilised GFA could lift its pro forma FY19 revenue and NAV by 14.7% and 10.3% respectively,” she says.
Meanwhile, the analysts brush off concerns over CWT International, which announced last week it has failed to pay accrued interests and fees to lenders totalling HK$63 million ($10.9 million) which have become due and payable under a HK$1.4 billion facility.
The group is controlled by Chinese conglomerate HNA Group, which itself is facing liquidity challenges.
CWT is a tenant of properties at 20 Gul Way and 30 Tuas West Road, which are managed by AA REIT.
AIMS APAC REIT Management said in a regulatory filing that CWT has so far not defaulted on its rental payments under their respective lease agreements.
It added that AA REIT presently holds security deposits ranging from three to six months of rental in the form of bank guarantees amounting to some $4.5 million.
See: AA REIT, CacheLog and MapletreeLog say no default on rents so far by tenant CWT
“AA REIT’s exposure to CWT was 8.9% of its gross rental income in 4Q19, of which 5.2% is set to fall with the expiry of its lease agreements in FY20,” says Chua.
According to Tay, efforts are ongoing by AA REIT to re-commit CWT spaces to prospective tenants or through direct leasing with underlying tenants
“As such, we anticipate slightly softer rents from some of the CWT-occupied spaces, but should be partly mitigated by higher occupancies under a multi-tenanted approach – which was a driver of the higher GRI this quarter,” Tay says.
Year to date, units in AA REIT are trading 7.5% higher at $1.43. According to DBS valuations, this implies an estimated price-to-earnings (PE) ratio of 15.1 times for FY20F.
