AIMS APAC REIT (‘AA REIT’) invests in a diversified portfolio of income-producing industrial, logistics and business park investment properties across Singapore and Australia. The Manager of the REIT, AIMS APAC REIT Management Limited, is wholly-owned by the sponsor, AIMS Financial Group. Interestingly, the largest unitholder is not the sponsor but ESR Cayman, which holds 12.8% of the outstanding units. ESR Cayman is a financially strong sponsor which has been gradually cobbling up smaller industrial REITs in Singapore. As a public REIT that has been listed on the SGX mainboard since 2007 (ticker code 05RU), who knows whether it will go down a similar path taken by its ESR Cayman-owned peers?
However, that is not what attracted me to take notice of the REIT. What really piqued my curiosity was the 38% rental reversion rate reported in its last results announcement. These are really obscene numbers that I thought only exists in the residential real estate market. Here is my blog review of AA REIT and I also ask myself this question “at what share price would I be a buyer of AA REIT?”
1) A under-rented Logistics & Warehouse Portfolio
AIMS APAC REIT’s properties are located in Singapore and Australia and generate rental revenue as shown in Diagram 1.
It is interesting to note that Australia contributed to 18% of the revenue in FY2023 but represented 40% of the total portfolio valuation. This is possibly due to the freehold tenure of the Australia properties as compared to Singapore industrial properties that are now granted only 30-year leasehold by the government.
As aforementioned, what caught my attention was the eye-popping positive 38% rental reversion as shown in Diagram 2.
Initially, I thought this was a one-off fluke but then I noticed that the rental reversion for the entire FY23 was 18.5%. Therefore, the Manager has been pulling off this incredible feat for more than a year already. In its news release, the Manager explained that this was due to several reasons:
- Existing leases in its logistics & warehouse properties are way below market rent
- Tight logistics supply in Singapore
Diagram 3 adds credibility to the Manager’s statement as the occupancy of its portfolio actually increased despite hiking rents by such a substantive amount. This seems to suggest that the poor old tenants have little choice but to pay a significantly higher rent because there is no lack of takers waiting in the queue.
With another 16% of its leases expiring in FY2024 and the bulk of it coming from its logistics & warehouse sub-sector, I expect this incredible trend of rental reversions to continue in the short term.
If you annualise the 1Q24 DPU, the current dividend yield is 7.4%. But don’t get too eager to conclude that the rental reversions will lift DPU because we need to be mindful of higher interest expenses.
2) Excellent Asset Management Track Record
Proactive lease management is usually more visible since unitholders tend to pay more attention to occupancy and rental reversions. What is less visible but equally important in my opinion is the Manager’s track record in executing Asset Enhancement Initiatives (‘AEI’). This is the less glamorous side of real estate management but when executed well, it can bring in incremental income and result in higher property valuation. On this aspect, the Manager of AA REIT has done very well considering the market capitalisation of the REIT.
As stated in its 2023 Annual Report, following the completion of the AEI at 23 Tai Seng Avenue, the Manager increased the Net Lettable area by 12% while securing a master lease tenant. Altogether, the valuation uplift is a remarkable 32% as shown in Diagram 4.
As recently as a few months ago, the Manager conducted a rights issue to raise funds to carry out more AEI that it has identified. If they continue to execute as per their track record, unitholders should have confidence that their investment in the preferential offering will have a good payoff.
3) Gearing Ratio
Diagram 5 shows the interest-bearing liabilities to asset ratio of AIMS APAC REIT as at 4Q FY23, which is 30 March 2023 since its financial calendar ends in March.
In its 1QFY24 business update, the Manager reported that the gearing ratio had dropped to 32.9%. At first glance, this is a very comfortable threshold as it is well below the 50% limit mandated by Monetary of Singapore (‘MAS’). However, a deeper investigation would reveal that it is not exactly a bed of roses.
Firstly, the drop in gearing was a result of the funds raised from the recent placement exercise. However, due to the timing of the implementation of the AEI, part of the funds was used to pare down debt first as prudent capital management. Therefore, I anticipate the gearing ratio to gradually return to the 35% level when the AEI are eventually completed.
Secondly, good REIT investors need to look past the headline gearing ratio and scan for the presence of any potential perpetuals.
Indeed, it turns out that AIMS APAC REIT has $373.6mil worth of perpetuals sitting on its balance sheet as shown in Diagram 6 that is not reflected under its liabilities. Note that perpetuals are treated as equity from an accounting perspective but in reality, they function just like debt. Specifically, AA REIT perpetual holders are promised a 5+% yield p.a. To service this interest obligation, the Manager would have to fund it from the AA REIT’s operating cashflow which means less distribution to unitholders. $373 mil of perpetuals equates to 16% of its total asset. If you combine it together with the headline gearing ratio, you would notice that it is precariously close to the 50% limit. To be fair, AA REIT is not the only REIT in the S-REIT universe that taps on perpetuals. Unitholders who choose to invest in this REIT just have to be mindful of the “actual” gearing ratio.
Finally, I did a back of the envelope calculation. The positive rental reversion that it has achieved over the past 2 years would help to largely mitigate against rising interest rates.
Having established that there are strong tailwinds and a commendable asset management track record, I will be a buyer of AIMS APAC REIT but only at the right price especially since I need to be cautious of its debt levels.
At What Price Would I Be A Buyer of AIMS APAC REIT?
To answer this question, I recall the lessons that I learnt from Dividend Machines by The Fifth Person. To determine the right price to buy or sell a REIT, studying its historical Price-to-Book (P/B) ratio would help provide some clues. A good entry point would be anywhere below or at 2 standard deviations (‘SD’) before its historical P/B average as shown in a chart.
With reference to Diagram 7, negative 2SD of the PB ratio is 0.82X. Given that its last announced NAV is S$1.34, this translates to a unit price of $1.10. Instead of constantly checking for its share price during market trading days, I simply set an alert on the moomoo mobile app as shown in Diagram 8.
Having done all the hard work, i.e. the analysis, I simply wait for moomoo mobile app to ping me. This is somewhat like fishing – having brought the right equipment, found the right spot, used the right bait, we simply wait patiently for the fish to bite. If that day comes, I hope that I have the courage to reel the line in. Well, consensus seem to suggest that is the case given the numerous BUY calls issued in analyst reports and the positive sentiment on the forums.
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This article is published on 12 August 2023
Disclaimer: All views expressed in the article are the independent opinion of Heartland Boy. Neither Moomoo Singapore or its affiliates shall be liable for the content of the information provided. It does not constitute and investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein.
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