Analysts from DBS Group Research and RHB Bank Singapore have lowered their target prices for AIMS APAC REIT (AA REIT) after the REIT reported a distribution per unit (DPU) of 9.36 cents for the FY2024 ended March 31, 5.9% lower y-o-y.
DBS’s Dale Lai and Derek Tan have lowered their target price to $1.55 from $1.60 previously, and RHB’s Vijay Natarajan has lowered his target price to $1.46 from $1.48 previously. Both brokerage houses have, however, kept their “buy” call on the REIT.
Natarajan says that the REIT’s DPU fell short of his estimates on higher financing costs and management fees in cash. However, the key highlight continues to be its “stellar” portfolio rent reversions for logistic assets.
The 4QFY2024 and FY2024 rent reversions of 32% and 24% were primarily driven by its Singapore logistics & warehouse portfolio which continues to benefit from strong market rent growth and its under-rented nature, says the analyst.
For FY2025, the analyst highlights that half of its 18% of leases expiring are from logistics assets. He notes that management has guided that rental reversions will be in high single digits to low double digits.
Meanwhile, portfolio occupancy dipped by 0.3 percentage points (ppts) q-o-q but remains high at 97.8% due to temporary vacancy and is expected to be backfilled in the coming quarters.
Natarajan highlights that AA REIT has ongoing redevelopment of two assets, with an expected return on investment (ROI) of 7%-8%. The REIT has secured a 15-year master lease with a storage and information management company, and leasing is expected to commence by 1QFY2026.
The second asset is the repositioning of an industrial building. Meanwhile, the REIT is in advanced negotiations with a global precision engineering and technology group for a new long-term lease for one-third of the building.
The total cost of about $32 million for the upgrade will be funded via last year’s fundraising, he adds.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
In addition, the analyst says that the REIT’s low gearing of 32.6% gives it some buffer to redeem perpetual securities (perps) with debt if needed, while keeping gearing below 40%. AA REIT has two perps outstanding for a total of $375 million, with the reset date in August 2025.
On the REIT’s decline in DPU, Natarajan attributes it to the larger unit base and higher financing costs. Valuation declined 1.3% y-o-y as gains from its Singapore portfolio were more than offset by declines in Australian assets due to the cap rate expansion.
“Financing cost rose 10 basis points (bps) q-o-q to 4.1%, and for FY2025, we expect it to remain at low 4% levels,” he says.
As a result, the analyst lowers his FY2025 - FY2026 DPU estimates by 2%-3%, factoring in higher interest cost assumptions and pushing back contribution from asset enhancements. The analyst adds a 4% environmental, social and governance (ESG) premium to their dividend discount model-target price of $1.46.
AA REIT’s DPU also stood below the estimates of DBS’s Lai and Tan, although they note that the REIT has a proven track record of carrying out asset enhancement initiatives (AEI) and redevelopment projects in its existing portfolio to drive growth in organic income.
“Within its current portfolio are several properties that have an untapped plot ratio and could generate up to 2.0 million sq ft of additional gross floor area to drive further growth in earnings and valuations,” they say.
They also note that AA REIT’s remaining multi-tenanted leases provided them with the flexibility to take advantage of higher rents, which they see as strong rental growth.
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While the analysts say that the lack of acquisitions and elevated costs might make it prohibitive for the REIT to embark on AEI projects and unlock its unutilised gross floor area as key risks, they remain positive on the REIT.
As such, they maintain their “buy” call with a target price of $1.55.
As at 1.40pm, units in AA REIT are trading 1 cent lower or 0.763% down at $1.30.
