RHB Group Research analyst Vijay Natarajan has maintained his “buy” recommendation for AIMS APAC REIT (AA REIT) with an increased target price (TP) of $1.50 from $1.48 previously.
Following the REIT’s 3QFY2023 ended December 2022 results, which slightly outperformed his expectations, Natarajan says that portfolio occupancy also continues to trend higher with strong double-digit rent reversions. This highlights the continued strong underlying demand, particularly for the logistics sector, he says.
Meanwhile, at 36.4% with an adjusted interest cover ratio of 2.3x, Natarajan says AA REIT’s gearing remains “sound” with a well-hedged balance sheet and costs mostly passed through, putting it in a good position. He adds that its valuation remains attractive at slightly below book value, and that it offers 7% dividend yields.
The analyst has revised his FY2023 to FY2025 distribution per unit (DPU) forecasts upwards by 1% to 2% by adjusting occupancy and rental assumptions. AA REIT’s environmental, social and governance (ESG) score of 3.2 out of 4.0 is two notches above RHB’s country median, and its new TP of $1.50 is therefore pegged to a 4% ESG premium.
Natarajan explains that the latest set of results show that the REIT’s 3QFY2023 and 9MFY2023 DPU rose 10% and 3% y-o-y respectively, aided by organic income growth and income distributions from AA REIT’s Australia portfolio that were held back in 1HFY2023.
Net property income (NPI) margins were also maintained at around 73.5% as the utility charges were mostly passed through, insulating AA REIT from utility cost increases.
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The analyst points out that of its total debt, 88% is hedged — higher than the 75% average of its peers — with hedges mostly tied to loan expiries. Based on its forecast, every 50 basis points (bps) increase in rates will have an estimated 1.7% DPU impact. AA REIT has no major debt expiries until FY2025 and around 70% of its Australian Dollar income is hedged on a rolling 12-month basis.
For the quarter, 3QFY2023 leasing momentum remained healthy with 27 leases, comprising 11 new leases and 16 renewals, or 6.7% of total net lettable area (NLA). Consequently, AA REIT’s overall portfolio occupancy improved to 97.8%, an increase of o.3 percentage points q-o-q, with all segments registering same or higher occupancies.
Rent reversions during this period came in 21% stronger, aided by continued market momentum in the logistics sector, which accounted for 82% of renewed leases.
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Natarajan adds that AA REIT noted that its tenants overall continued to remain optimistic on leasing prospects despite signs of a manufacturing slowdown in Singapore. With over 70% of its leases due for renewal in 4QFY2023 or FY2024 remaining in the favourable logistics segment, coupled with its below-market portfolio rent, he expects rent reversions to stay positive in coming quarters, at 5% to 15%.
He expects portfolio values to be maintained or come in slightly higher during AA REIT’s upcoming revaluation exercise, underpinned by healthy organic income growth and investor demand for logistics assets. AA REIT has stated that acquisitions are not its focus at this time, and will instead look to extract more value from existing assets via asset enhancements. It is also currently exploring divestment opportunities to recycle capital.
As at 3.30pm, units in AA REIT were trading flat at $1.38, with a dividend yield of 5.45%.
