AIMS APAC REIT: Portfolio occupancy at record-high; +36.8% rental reversions
- Solid positive rental reversions of +36.8% in 4Q23, driven by warehouse and logistics properties
- FY23 DPU of 9.944 Scts more than 5% higher y-o-y, outperforming expectations
- More AEIs/redevelopments and lease conversions on the cards; set to drive next leg of growth
- Maintain BUY with higher TP of S$1.60
- FY23 revenues grew 17.6% y-o-y to S$167.4m and NPI grew 18.7% y-o-y to S$122.5m
- Largely due to full year contribution from Woolworths HQ (acquired on 15 Nov 2021)
- Also due to higher rents and recoveries from properties
- Higher NPI was also contributed to by improved NPI margins
- FY23 NPI margins of 73.2% (0.7 ppt higher y-o-y)
- FY23 DPU of 9.944 Scts was 5.1% higher y-o-y
- Outperformed our projections by c.15%
- Outperformance was mainly due to better-than-expected revenues and NPI margins
- Higher revenues were partially offset by higher borrowing costs and trust expenses
- Portfolio occupancy also improved 0.4 ppt y-o-y to 98.0%; record-high occupancy
- Higher occupancy rates at 135 Joo Seng Road, 61 Yishun Industrial Park A, and 7 Clementi Loop
- Portfolio occupancy was 0.2 ppt higher q-o-q (3Q23 occupancy of 97.8%)
Solid positive rental reversions of +36.8% in 4Q23
- Strong positive rental reversions from the Logistics & Warehouse (+41.6%) and General Industrial (+23.0%) segments
- Slight negative rental reversions from Business Park (-1.2%) segment
- For FY23, overall rental reversions were very strong +18.5%
- Should expect further positive rental reversions going forward as passing rents for most segments are still below market rents
- Only the Business Park and Light Industrial segments have passing rents in line with current market rents
- C.21.5% of portfolio leases will be due to expire in FY24
- Majority of these expiries (c.19.4%) are from the Logistics & Warehouse segment which should continue to see strong positive rental reversions
- WALE of 1.4 years for the Logistics & Warehouse segment is the shortest in AAREIT’s portfolio
- Will be a positive for AAREIT in this part of the cycle as rents for logistics facilities continue to grow strongly
- AAREIT’s passing rents for this segment is c.S$1.22 psf, compared to current market rents of between S$1.40-S$1.80
- Rental reversions for logistics facilities expected to be in the positive double-digit range
- Portfolio valuations declined 0.6% (S$13.5m) y-o-y, mainly due to depreciation of the AUD against the SGD
- Singapore portfolio valuation increased c.2.1%
- Mainly due to conversion of 23 Tai Seng to a master lease and additional NLA
- 23 Tai Seng fully leased to Racks Central, a data centre operator, with an average lease term of seven years
- NLA increased 32%
- Australia portfolio declined 1.0% in local currency terms
- Slight cap rate expansion for Optus Centre and Woolworths HQ (c.12 bps expansion)
- Cap rates for the rest of the portfolio remained relatively stable
- Singapore average: 5.95%
- Australia average: 5.64%
- Divestment of 541 Yishun Industrial Park A expected to be completed by September 2023
- Sale price of S$12.88m, an 8.2% premium to latest valuations
- Slight improvement in gearing q-o-q to 36.1% (vs. 36.4% last quarter)
- Financing costs inched up 0.2 ppt q-o-q to 3.4%
- Financing costs expected to continue inching up due to higher interest rates, but likely to be relatively stable as no refinancing due in FY24
- C.88% of debt has been hedged to fixed rates
- Next refinancing only in November 2024 (S$100 MTN, 3.6% per annum)
- Every 25 bps increase in interest rates will have a c.0.8% impact to DPUs
- AAREIT is currently studying the possibility of two AEIs and one potential redevelopment
- The two AEIs could potentially cost c.S$30m; improve the specifications of the property to cater to advanced manufacturing and logistics tenants
- The 1 potential redevelopment could lead to some downtime for the asset (12 – 18 months), but will be beneficial for stronger revenue growth once completed
- In discussions with an advanced manufacturing tenant to potentially take up a master-lease at a property
- Requires careful planning as there are still tenants who occupy that property
- New master tenant will likely have to progressively take over the space at the asset as existing leases expire
- In advanced negotiations with KWE-Kintetsu World Express to renew their lease for another five years
- Tenant is currently the fourth-largest tenant, accounting for c.6.1% of revenues
- Current WALE of 0.8 years
- With the conclusion of the KWE-Kintetsu lease extension, c.90% of all master leases within AAREIT’s portfolio will have in-built rental escalations
Overall, we were pleasantly surprised with AAREIT’s better-than-expected performance. Their continued strong positive rental reversions (+18.5%) and record-high portfolio occupancy (98.0%) continue to drive earnings growth. More importantly, the various portfolio enhancement initiatives over the past year have also led to organic income growth. Most recently, the S$1.6m AEI at 23 Tai Send Drive led to the seven-year master lease by Rack Central. In addition to the uplift in valuation of the asset, the master-lease also enabled AAREIT to increase the NLA of the property by c.32%.
On the capital management front, although we expect borrowing costs to continue inching up with higher interest rates, AAREIT’s high proportion of loans hedged to a fixed rate (c.88%) and no refinancing needs until FY25 will help mitigate any spike in borrowing costs. Looking ahead, we remain positive on management’s plans to further drive organic growth to income. In addition to advanced negotiations to convert a multi-tenanted building to a long-term master lease, there are also several AEIs and redevelopments opportunities that AAREIT is currently studying.
Based on AAREIT’s better-than-expected operational performance and earnings in FY23, we have revised our projections to account for higher rents and occupancy rates throughout their portfolio, as well as the improvement in NPI margins. At the same time, we have also taken the opportunity to assume a gradual creeping up in financing costs through to FY25 as interest rates are expected to remain higher-for-longer.
We maintain our BUY recommendation with a higher TP of S$1.60. Our revised projections could potentially have upside risks once AAREIT’s AEIs and tenant conversion plans materialise.
FY Mar | 2H2022 | 1H2023 | 2H2023 | % chg y-o-y | % chg h-o-h |
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Gross revenue | 77.1 | 83.2 | 84.2 | 9.1 | 1.2 |
Property expenses | (21.7) | (22.1) | (22.8) | 5.3 | 3.4 |
Net Property Income | 55.5 | 61.1 | 61.4 | 10.6 | 0.4 |
Other Operating expenses | (13.2) | (8.8) | (13.5) | 1.9 | 54.0 |
Other Non Opg (Exp)/Inc | 7.01 | 3.68 | (0.1) | N/A | (101.9) |
Associates & JV Inc | 20.9 | 11.5 | 4.50 | (78.4) | (61.0) |
Net Interest (Exp)/Inc | (11.9) | (15.4) | (17.6) | (48.4) | (14.3) |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | N/A | N/A |
Net Income | 58.3 | 52.2 | 34.7 | (40.4) | (33.5) |
Tax | (3.8) | 0.67 | 1.08 | (128.2) | 61.1 |
Minority Interest | 0.0 | 0.0 | 0.0 | N/A | N/A |
Net Income after Tax | 54.4 | 52.9 | 35.8 | (34.3) | (32.3) |
Total Return | 33.5 | 61.9 | 52.0 | 55.3 | (15.9) |
Non-tax deductible Items | 17.8 | (11.2) | 3.27 | (81.7) | (129.3) |
Net Inc available for Dist. | 51.3 | 50.7 | 55.3 | 7.7 | 9.0 |
Ratio (%) |
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Net Prop Inc Margin | 71.9 | 73.5 | 72.9 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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