• Stay BUY, higher SGD1.50 TP from SGD1.48, 11% upside. AIMS APAC REIT posted good set of 3QFY23 (Mar) numbers that slightly exceeded our expectations. More importantly, portfolio occupancy continues to trend higher with strong double-digit rent reversions highlighting continued strong underlying demand, particularly for the logistics sector. Gearing remains sound with a well-hedged balance sheet and costs mostly passed through – this puts the REIT in a good position. Valuation remains attractive at slightly below book, and it offers 7% dividend yields.

• A strong quarter. 3QFY23 and 9MFY23 DPU rose 10% and 3% YoY, aided by organic income growth and income distributions from AAREIT’s Australia portfolio that were held back in 1HFY23. NPI margins were also maintained at c.73.5% as the utility charges were mostly passed through – hence, the REIT remains insulated from utility cost increases. 88% of its debt are hedged – higher than peers’ c.75% average – with hedges mostly tied to loan expiries. Based on its forecast, every 50bps increase in rates will have a c.1.7% DPU impact. AAREIT has no major debt expiries until FY25 and c.70% of its AUD income is hedged on a rolling 12-month basis.

• Double-digit rent growth is likely to continue. 3QFY23 leasing momentum remains healthy with 27 leases (11 new and 16 renewals) or c.6.7% of total NLA. Consequently, overall portfolio occupancy improved to 97.8% (+0.3ppts QoQ), with all segments registering same or higher occupancies. Rent reversions during this period came in much stronger at +21%, aided by continued market momentum in the logistics sector (+26%), which accounted for the bulk of leases renewed (82%). Management noted that its tenants overall continued to remain optimistic on leasing prospects despite signs of a manufacturing slowdown in Singapore. As the bulk of leases due for renewal in 4QFY23 or FY24 (>70%) remains in the favourable logistics segment, coupled with its below-market portfolio rent, we expect rent reversions to stay positive in coming quarters, at 5-15%.

• Valuations to remain stable, healthy gearing levels. We expect portfolio values to be maintained or come in slightly higher during the upcoming revaluation exercise – underpinned by healthy organic income growth and investor demand for logistics assets. Gearing remains comfortable at 36.4% with an adjusted interest cover ratio of 2.3x. Management notes that acquisitions are not the focus at this time, with AAREIT instead looking to extract more value from existing assets via asset enhancements. It is also currently exploring divestment opportunities to recycle capital.

• We revise up our FY23F-25F DPU by 1-2% by fine-tuning our occupancy and rental assumptions. AAREIT’s ESG score of 3.2 out of 4.0 (based on our proprietary methodology) is two notches above our country median, hence, we pegged a 4% ESG premium to derive our new SGD1.50 TP.

Source: RHB Research - 26 Jan 2023