• BUY, new TP of SGD1.48 from SGD 1.66, 19% upside with 8% FY23F (Mar) yield. We hosted AIMS APAC REIT’s management in a non-deal roadshow (NDR) post-1HFY23 results, which came in slightly below our estimates. Overall, management’s outlook remains positive, and it still expects to see strong demand for its logistics assets in Singapore. AAREIT is also well-positioned to weather rising interest rate challenges, with a high debt hedge (88%) and very minimal debt maturing until FY25. Margins are expected to be maintained, with utility charges mostly passed through.

• 1HFY23 DPU dipped by 1.1% YoY, mainly impacted by higher interest costs, slightly higher management fees in units (33% vs 25% last year) and FX impact. Adjusted DPU excluding one-off reversals last year was up 0.9% YoY. Its NPI margin remained stable at 73%, as management had proactively adjusted contracts to pass through higher utility charges. Additionally, AAREIT plans to roll out higher service charges in the coming months, after which it expects margins to move closer to 75%. Its portfolio value held steady at SGD2.2bn, with cap rates mostly unchanged.

• Healthy positive rental reversions to continue with the majority of lease expiries in the near term coming from the logistics segment in Singapore, where demand continues to outpace supply. 1HFY23 rental reversions stood at 8.1%, with all segments registering positive rent reversions this quarter. AAREIT’s portfolio occupancy rate dropped to 97.5% (1QFY23: 97.9%) which management attributed mainly to transitional vacancies and timing differences. It expects this to be backfilled in the coming quarter. Its Australian assets are fully occupied, and on long leases with annual rental rate escalations of c.3%, adding stability to its income.

• Acquisitions are not the focus amidst the current interest rate volatility, with its attention largely on extracting value from properties by asset enhancement. Its gearing remains comfortable at 36.5%. 88% of its debts are currently on fixed rates (65% on fixed interest rate loans and 23% via swaps), with every 50bps increase in the interest rate expected to affect its DPU by 1.7%. 67% of its AUD-denominated income is hedged on a rolling 12-month basis, thereby mitigating FX fluctuations.

• The REIT is sharpening its ESG metrics with the proposed installation of large-scale rooftop solar systems across six of its Singapore properties by Dec 2023. This should boost its renewable energy source and reduce carbon emissions.

• We trim FY23-25F DPU by 3-4%, mainly by adjusting our finance cost assumptions and lifting our COE assumption by 50bps, in line with the sharp rise in interest rates. Our ESG score of 3.2 out of 4.0 (based on our proprietary methodology) is two notches above our country median, so we applied a 4% ESG premium to AAREIT’s intrinsic value to derive our TP.

Source: RHB Research - 28 Oct 2022