RHB Group Research analyst Vijay Natarajan has initiated coverage on AIMS APAC REIT (AA REIT) with a “buy” recommendation and a target price of $1.55, the highest among all the other estimates put forth by other brokerages.

AA REIT’s price-to-book value (P/BV) at 0.95 times below its five-year mean is “highly unjustified” at a 50% discount to its industrial REIT peers, he writes in an April 8 report.

The way Natarajan sees it, the REIT is an “undervalued and overlooked industrial REIT” with 28 high-quality industrial assets in Singapore and Australia.

The REIT derives half of its income from logistics assets, which have emerged as key beneficiaries following Covid-19.

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“The strong demand for such assets has boosted its portfolio occupancy by 6.3 percentage points year-to-date (y-t-d) to 95.7%,” notes the analyst.

“Its two Australian assets offer stable long-term organic growth from long-term (12-year) master leases with inbuilt annual rent escalations,” he adds.

In addition, Natarajan expects a turnaround in distribution per unit (DPU) for the REIT in FY2022 by 9%.

This, he says, should be aided by two recent accretive acquisitions in Singapore, occupancy improvements and the absence of one-off rental rebates.

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“With a modest post-acquisition gearing of 39%, we believe the REIT still has room for acquisition-led growth. AA REIT is also a potential M&A candidate in the medium term, in our view.”

One of the REIT’s core strengths, according to Natarajan, is its established track record of extracting value from existing industrial assets via redevelopment, built-to-suit developments and asset enhancement initiatives (AEIs).

“The REIT has so far embarked on nine such major initiatives, which has yielded an attractive return on investment (ROI) of 8-10% on its investment cost. There is potential untapped gross floor area (GFA) of around 502,707 sq ft in its current portfolio, which we believe will be unlocked at an opportune time,” he writes.

The REIT’s high ranking among environmental, social and governance (ESG) metrics – including being ranked third out of 45 listed REITs and trusts in the independent Governance Index for Trusts (GIFT) 2020 rankings – puts it in a “good position” due to increasing investor focus towards sustainability, says the analyst.

As at 1.05pm, units in AA REIT are trading 1 cent higher or 0.8% up at $1.33.