“AA REIT has a proven track record in carrying out AEIs [asset enhancement initiatives] and redevelopment projects on its existing portfolio to drive organic income growth. Within its current portfolio are several properties that have untapped plot ratio and could generate up to 2.0 million sq ft of additional GFA [gross floor area] that would drive further earnings and valuations growth,” write DBS Group Research analysts Dale Lai and Derek Tan.

In a May 8 note, Lai and Tan maintain their “buy” call on AA REIT with a higher target price of $1.60 from $1.40 previously.

AA REIT’s FY2023 revenue grew 17.6% y-o-y to $167.4 million and net property income (NPI) grew 18.7% y-o-y to $122.5 million.

“Overall, we were pleasantly surprised with AA REIT’s better-than-expected performance,” say the DBS analysts. “Their continued strong positive rental reversions (up 18.5%) and record-high portfolio occupancy at 98.0% continue to drive earnings growth. More importantly, the various portfolio enhancement initiatives over the past year have also led to organic income growth.”

AA REIT posted a distribution per unit (DPU) of 5.244 cents for 2HFY2023, 11.3% higher y-o-y. This brings its FY2023 DPU to 9.944 cents, 5.1% higher y-o-y, beating DBS’s projections by some 15%. “[The] outperformance was mainly due to better-than-expected revenues and NPI margins.”

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/capital/results/aims-apac-reit-reports-113-increase-2hfy2023-dpu-5244-cents?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>AIMS APAC REIT reports 11.3% increase in 2HFY2023 DPU of 5.244 cents</a>

‘Firing on all cylinders’

Meanwhile, RHB Bank Singapore analyst Vijay Natarajan thinks the strong double-digit rental reversions are expected to continue.

“4QFY2023 and FY2023 rental reversions grew at a healthy 37% y-o-y and 19% y-o-y. This came mainly on the back of an uplift from under-rented logistics assets (passing rent around $1.22), which got rolled over to market rents (passing rent at around $1.40 to $1.80), as well as master lease signings at general industrial assets,” writes Natarajan.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/dbs-upgrades-grab-buy-higher-tp-us429?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>DBS upgrades Grab to ‘buy’ with higher TP of US$4.29</a>

For FY2024, some 90% of AA REIT’s 21.5% expiring leases are in the logistics segment, so rent reversions are expected to remain at a healthy 20% and above, he adds. “Its portfolio occupancy rate stands at record high 98%, boosted by continued demand for its logistics space, as well as general industrial assets. Its Australian assets are under long master leases (seven to 10 years), with annual 3%-4% rental rate escalations providing income stability and growth.”

In a May 8 note, Natarajan maintains “buy” on AA REIT with a higher target price of $1.55 from $1.50 previously.

AA REIT is firing on all cylinders, says the RHB analyst. “Asset enhancements at 23 Tai Seng drive are done, and this boosted the property’s valuation and net lettable area (NLA) by 32%. More of such options are currently being evaluated, with an expected return on investment (ROI) of 6%-8%.”

In April, AA REIT announced the divestment of a non-core general industrial asset, 541 Yishun Industrial Park A, for $12.9 million, implying a 8% premium to its valuation. “Meanwhile, management is starting to see yield-accretive acquisition opportunities in Singapore and Australia, but noted that it intends to maintain net gearing at 30%-40% levels,” says Natarajan.

Watch for financing costs

That said, Maybank Research analyst Li Jialin warns about AA REIT’s higher financing costs. While the REIT has no debts due for refinancing in FY2024, a lumpy 88% of its debt is hedged.

AA REIT’s full-year revenue growth of 18% y-o-y was partially offset by higher financing cost, up 45% y-o-y and 15% h-o-h, notes Li. All-in cost of debt has risen 70 basis point (bps) to 3.4% in FY2023 on the floating portion, or some 12% of debt.

In a May 8 note, Li maintains “buy” on AA REIT but with a lower target price of $1.50 from $1.56 previously. Li factors in a higher financing cost in FY2024-2025 forecasts, while rolling forward her forecast to FY2026 while lowering FY2024-2025 estimates by 1%-2% on higher financing cost, forex exposure and the divestment of 541 Yishun Industrial Park A.

As at 2.48pm, units in AIMS APAC REIT are trading 1 cent higher, or 0.71% up, at $1.41.

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