Analysts from DBS Group Research and RHB Group Research have both maintained their “buy” calls on AIMS APAC REIT (AA REIT), but have handed the stock new target prices of $1.40 and $1.48 respectively.
This is down from their previous target prices of $1.55 and $1.66 respectively.
In an Oct 27 note, DBS analysts Dale Lai and Derek Tan explained that the REIT has delivered on acquisitions to drive distribution per unit (DPU) growth of about 6% in the past year and we expect the growth trajectory to continue.
“However, with gearing already at optimal levels, we assume further growth will require some equity fundraising.”
Nonetheless, they still think that there is potential for organic growth in its portfolio, noting that the REIT can tap unutilised gross floor area (GFA) of more than 500,000 sq ft within its Singapore portfolio.
This is in addition to the recently acquired Woolworths HQ in New South Wales, Australia, which gives an opportunity to leverage on approximately another 1.5 million sq ft of unutilised GFA.
Moreover, the annual rental escalations for its master leases provide for organic revenue growth of about 1%-3%.
Lai and Tan look forward to the REIT’s next accretive acquisition, highlighting the stock’s recent inclusion in the FTSE EPRA NAREIT Developed Asia Index.
The index is designed to represent general trends in eligible real estate equities worldwide.
They believe the improved trading liquidity of AA REIT and potential re-rating that comes along with the inclusion “could enable it to embark on further accretive acquisitions, despite the stiff competition for good-quality income-producing assets.”
On the interest rate front, although AA REIT has no debt expiring until FY2024 and about 88% of its borrowings are hedged to fixed rates, Lai and Tan taken a conservative view and have assumed a 100 basis points (bps) increase in financing costs over the next three years.
As for RHB’s Vijay Natarajan, he notes that the REIT’s management’s outlook remains positive, and it still expects to see strong demand for its logistics assets in Singapore.
He says that “healthy” positive rental reversions will continue, with the majority of lease expiries in the near term coming from the logistics segment in Singapore, where demand continues to outpace supply.
The REIT is also not likely to be affected by rising interest rates, with Natarajan noting the 88% fixed debt level.
Its gearing remains “comfortable” at 36.5%, and every 50 bps increase in interest rates is expected to affect its DPU by 1.7%.
Additionally, 67% of its AUD-denominated income is hedged on a rolling 12-month basis, thereby mitigating foreign exchange fluctuations.
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He adds that “margins are expected to be maintained, with utility charges mostly passed through.”
Its net property income (NPI) margin remained stable at 73%, as management had proactively adjusted contracts to pass through higher utility charges.
Additionally, the analyst says AA REIT plans to roll out higher service charges in the coming months, after which it expects margins to move closer to 75%.
Moving forward, Natarajan, acquisitions are not the focus for AA REIT amidst the current interest rate volatility.
Instead, he thinks that its its attention largely on extracting value from properties by asset enhancement.
As at 11am, shares of AA REIT were trading at $1.21, with an FY2023 P/B ratio of 0.87 and dividend yield of 7.6%, according to RHB’s estimates.