Initiate coverage of AIMS APAC REIT (AA REIT) with a BUY rating
AA REIT owns 28 industrial properties in Singapore and Australia, of total lettable area of 0.78m sqm valued at S$2.2 billion.
Singapore contributes 75% of gross rental income, with logistics and warehouses making up 48%.
Sole sponsor, AIMS Financial Group (AFG), an Australian diversified financial services and investment group, owns 100% of the REIT manager, AIMS APAC REIT Management Ltd and 9.1% stake in AA REIT. ESR Group has a shareholding of 12.8%.
Near full occupancy and strong rental reversions
The assets enjoy near full occupancy of 97.3% in 1Q25. Rental reversion was +12.8% (FY24: +24.3%), fuelled by +26.8% for logistics and warehouse assets.
We expect growth to moderate to +9% in FY25E, as leases signed at low rates during Covid fade off, and impending 4.4m sqm upcoming supply of industrial space in Singapore.
Growth would be driven by 1) refurbishment at 7 Clementi Loop to meet requirements for a new 15-year master lease; 2) repositioning of 15 Tai Seng Drive to high-tech specs to target advanced manufacturing tenants; and 3) augmented demand for logistics and warehouses underpinned by e-commerce and the push to build supply chain resilience.
AA REIT stands out in the sector
AA REIT stands out in the sector in 1) active asset rejuvenation and build-to-suit redevelopment; 2) securing master leases for long-term income visibility. 10 out of the 28 properties are on master-leases; and 3) conversion of single-user property to multi-user for higher gross yield.
These initiatives raise the value of Singapore assets, in spite of the natural lease decay on the leasehold assets. On the other hand, the value of Australian assets faced higher cap rates and weaker Australian dollar.
There is no debt refinancing need till FY27, after it recently took up a sustainability-linked loan facility of up to S$400m and A$150m. AA REIT is likely to redeem S$100m 3.6% medium term note due Nov 2024 and S$125m 5.65% perpetual securities due Aug 2025.
We expect FY25E average interest cost to rise to 4.8% (1Q25: 4.3%) before retreating in FY26E. Aggregate leverage could land at 34% and interest coverage 2.5x for FY25E.
Demand for logistics and warehouses is expected to stay strong
Demand for logistics and warehouses is expected to stay strong, on the back of 1) sustained demand for e-commerce and stockpiling to avert supply chain disruptions; 2) more manufacturing bases outside China to overcome US trade restrictions; 3) strong foreign direct investments in the region.
One concern is impending new supply of 4.4m sqm of industrial space (8.3% of current stock of 53.2m sqm), of which 56% will be ready in 2024/2025.
There are upside risks to our forecast if interest rates fall at a faster rate, and A$ strengthens against the S$. Downside risks are lease terminations, in particular, the single-user assets.
Our target price for AA REIT is S$1.43
Our target price for AA REIT is S$1.43, derived from dividend discount model at weighted average cost of capital of 8.8% and terminal growth rate of 2%.
This translates to distribution yield of 6.4% and 6.7% for FY24E and FY25E, respectively.
At the current price, AA REIT is trading at 7.0% and 7.4% yield for the two years, respectively.
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