RHB Group Research has kept “buy” on AIMS APAC REIT with a higher target price of $1.72 from $1.70 previously, on strong fundamentals.

The new target price represents an upside of 22% from the REIT’s last-closed share price of $1.41 on Oct 5, and a yield of 7%.

The REIT has recently seen an 11% drop in its share price over the last one month, mainly on concerns over its recent management changes, major shareholder sell-downs and acquisition delays and pricing.

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However, RHB analyst Vijay Natarajan believes that the concerns are “transient in nature” and does not alter the REIT’s strong business fundamentals.

To Natarajan, AIMS APAC REIT remains an “attractive play on the industrial and logistics sector”, as it is trading at an attractive 1 times price-to-book value (P/BV).

The REIT’s recent induction into the FTSE EPRA Nareit Index is also a positive re-rating factor.

On the REIT’s proposed acquisition of Woolworths’ headquarters in Sydney on Sept 30, Natarajan says the asset’s long weighted average lease expiry (WALE) of 10 years and blue chip tenant quality more than compensates for the aggressive pricing and slightly lower initial net property income (NPI) yield.

“Additionally, there is a strong redevelopment potential (up to four times the current size) and leases also come with built-in rent escalations of 2.75% per annum, with up to 20 years of extension options,” he writes in an Oct 6 report.

Natarajan also notes that the proposed acquisition of 315 Alexandra Road, which is still expected to go through despite delays, will increase the REIT’s gearing to 42% assuming 100% debt funding.

On this, he believes that there is a medium-term possibility of $50 million to $100 million in equity fund raising.

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To this end, Natajaran has lowered his distribution per unit (DPU) estimate for the FY2022 by 2%. He has, however, increased his DPU estimate by 1% for the FY2023 to FY2024, factoring in the latest deal and delays to the acquisition of 315 Alexandra Road.

“Based on our proprietary in-house methodology we derive an environmental, social and governance (ESG) score of 3.2 out of 4.0 for AA REIT. As this is higher than the country median score (3.0), we have applied a 4% ESG premium to our DDM-derived intrinsic value,” he says.

Units in AA REIT closed 2 cents higher or 1.42% up at $1.43 on Oct 6, or an FY2022 P/B of 1.01 times and dividend yield of 6.9%.

Cover image of Woolworths HQ: AIMS APAC REIT