RHB makes no changes to AIMS APAC REIT estimates, maintains 'buy' with unchanged TP of $1.47

RHB analyst says the REIT has reported “another strong quarter”, but expects a slight decline due to earnings drag for the FY2024.

RHB Bank Singapore analyst Vijay Natarajan has made no changes to his “buy” call and target price of $1.47 for AIM APAC REIT, following the REIT’s 1HFY2024 ended Sept 30 results.

Natarajan notes that the REIT has reported “another strong quarter”, as its 2QFY2024 financials were in line. The REIT’s distributable income rose 7% y-o-y to $36.1 million, driven by healthy operational income growth across its portfolio, which offset its interest cost increase, he says.

However, the analyst notes that the REIT’s distribution per unit (DPU) declined slightly by 1.1% y-o-y, due to an enlarged unit base following the $100 million amount raised earlier this year.

The REIT’s average interest cost rose 10 basis points (bps) q-o-q to 4% and Natarajan expects it to peak at about 4.3% p.a. Meanwhile, fixed rate debt declined 10 bps q-o-q to 77% as few of its interest rate swaps expired this quarter.

“We expect full year valuations to stay put with slight gains for Singapore portfolio offsetting anticipated slight decline in Australian assets due to cap rate expansion and forex weakness,” the analyst says.

The REIT experienced solid rent reversions of 37.7% for the 1HFY2024, that came mainly from its logistics and warehouse assets in Singapore aided by strong demand and market rent growth over the last three years, Natarajan notes. For the remainder of the year, about 13% of its leases are up for renewal of which about 82% will come from its Singapore logistics assets.

“We expect the strong double digit rent reversions to continue. AAREIT is currently in advanced negotiations with KWE-Kintetsu World Express, one of its top-10 tenants (about 5.9% of income), on lease renewal for another five years (current lease expiring end of the year),” he says. “Portfolio occupancy stood flat q-o-q at a healthy 98.1%.”

Following the completion of divestment of 541 Yishun Industrial Park for $12.9 million (8% premium to valuation), the REIT’s gearing came in at 32.1%, Natarajan notes.

This does not include its two perpetual securities (perps) that are due for rate reset in Aug 2025 ($125 million of perps) and Sept 2026 ($250 million).

Meanwhile, asset enhancement initiatives (AEIs) at two of its earlier identified assets are expected to commence later this year. The first involves significant upgradation of an existing logistic asset into a prime logistic facility for which it has already entered into a non-binding long-term lease agreement with an end tenant. The second project is a repositioning of an existing highspec industrial asset that is expected to result in a 30% rent uplift.

“These AEIs are expected to cost SGD32m with a targeted ROI of 7-8%,” says Natarajan.

With that, the analyst makes no changes to his estimates, in anticipation of a slight decline for FY2024 mainly due to earnings drag from an enlarged share base.

As the REIT’s environment, social and governance (ESG) score is 3.2, two notches above the country ESG median, Natarajan has applied a 4% ESG premium to his dividend discount model-derived target price.

As at 10.58am, units in AIMS APAC REIT are trading flat at $1.25.

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