DBS keeps ‘buy’ on AA REIT with lowered TP of $1.53

The REIT saw positive rental reversions of 9.5% in 1QFY2023, coming mostly from warehouse and logistics properties lease renewals

DBS Group Research analysts Dale Lai and Derek Tan have kept a “buy” rating on AIMS APAC REIT (AA REIT) with a lowered target price of $1.53 from $1.55.

The analysts’ new target price implies a target yield of 6.2% FY2023 and P/NAV of 1.1x.

“AA REIT has delivered on acquisitions to drive distribution per unit (DPU) growth of around 6% in the past year and we expect the growth trajectory to continue,” says Tan and Lai. “However, with gearing already at optimal levels, we assume further growth will require some equity fundraising.”

In addition to the potential to tap into unutilised gross floor area (GFA) of more than 500,000 sq ft within the REIT’s Singapore portfolio, the recently acquired Woolworths HQ in November 2021 presents an opportunity to leverage on a further approximate 1.5 million sq ft of unutilised GFA.

Moreover, the annual rental escalations for its master leases provide for organic revenue growth of around 1%-3%.

Lai and Tan observes that AA REIT’s 1QFY2023 revenue increased 29.8% y-o-y to $41.3 million, and net property income improving 34.4% y-o-y to $31.0 million, mainly attributed to income contribution from Woolworths HQ.

The REIT also saw positive rental reversions of 9.5% in 1QFY2023, mainly coming from lease renewals at warehouse and logistics properties.

“Following on from the acquisition of Woolworths HQ in Sydney, we look forward to its next accretive acquisition in FY2023,” write the analysts. “With the stock’s recent inclusion in the FTSE (Financial Times Stock Exchange) EPRA (European Real Estate Association) NAREIT (National Association of Real Estate Investment Trusts) Developed Asia Index, we 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.”

The FTSE EPRA NAREIT Developed Asia Index is a subset of the FTSE EPRA NAREIT Developed Index and is designed to track the performance of listed real estate companies and REITS.

Some key risks the analysts consider include the lack of acquisitions and elevated costs that make it prohibitive for AA REIT to embark on asset enhancement initiative (AEI) projects to unlock its unutilised GFA.

Overall, AA REIT reported a healthy set of 1QFY2023 results, say the analysts. “Revenues came largely in line with our projections, but DPU of 2.28 cents was slightly below our estimates at 24% of our full-year estimates, as some income from Australia has been retained,” they write. “This has been a common practice for AA REIT, as retention is a prudent approach and bodes well for general working capital purposes.”

“Although AA REIT has no debt expiring until FY2024 and with70% of borrowings hedged to fixed rates, we have still assumed a 30 basis point (bps) increase in financing costs over the next three years to remain conservative,” the analysts add

As at 10.17am, units in AA REIT are trading at 1 cent down or 0.72% lower at $1.38.

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