DBS Group Research has upgraded its call on AIMS APAC REIT (AA REIT) to “buy” from “hold with an unchanged target price of $1.60 on Oct 1.

According to analysts Dale Lai and Derek Tan, the target price implies a target yield of 5.9% (FY2023) and a price-to-net asset value (P/NAV) of 1.19 times.

In the same report, Lai and Tan explain that the upgrade was due to the REIT’s valuation.

“The manager has delivered on an acquisition to drive DPU growth of [around] 9% in FY2023. The acquisition of Woolworths HQ will enhance AA REIT’s portfolio by 27% and offers an attractive accretion of 4% to DPU,” they write.

See: AIMS APAC REIT looks to acquire Woolworths Headquarters in Sydney for A$463.25 million

In addition, the REIT has potential to tap on an unutilised gross floor area (GFA) of over 500,000 sq ft within its Singapore portfolio.

The acquisition of Woolworths HQ also presents the opportunity leverage for a further 1.5 million sq ft of unutilised GFA, note Lai and Tan.

“Moreover, the annual rental escalations for its master-leases provides for organic revenue growth of 1%-3%,” they add.

Following the acquisition of Woolworths HQ, Lai and Tan are looking forward to the completion of the acquisition of 315 Alexandra Road in Singapore.

“With the stock’s recent inclusion into the FTSE EPRA NAREIT Developed Asia Index, we believe the improved trading liquidity of AA REIT and potential lowering in cost of equity would enable it to embark on further accretive acquisitions despite the stiff competition for good quality income-producing assets,” they write.

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To this end, the analysts say their estimates are “more conservative” due to their assumption of a potential equity fund raising of $100 million to manage the REIT’s balance sheet.

“Fund raising of less than $100 million presents upside to our earnings estimates,” they write.

Units in AA REIT closed 2 cents lower or 1.39% down at $1.42 on Oct 1, with an FY2022 P/NAV of 1.1 times.

Photo: AA REIT