• FY21 DPU of 15.258 scts (+3.9% YoY) missed, forming 95.1% of our forecast. DPU growth was driven by contributions from newly acquired properties.
• Portfolio occupancy up 1.5ppts YoY to 93.2%, with average reversions of +4.5% on leases signed in FY21 (FY20: 3.8%). Record S$2.1bn in investments/AEIs completed in FY21 with S$647mn worth of ongoing AEIs/redevelopments.
• Reiterate BUY, DDM-TP lowered from S$3.65 to S$3.52. FY22-25e DPUs dip 2.1-4.9% after factoring in higher OPEX. Our DDM-based TP is lowered by 3.6% to S$3.52 due to lower DPUs and higher COE of 6.12% (previous 6.0%), after factoring a higher risk-free rate. AREIT remains our top pick for the sector in view of its scale and diversification. The REIT also continues to forge a future-ready portfolio by increasing its exposure to growth sectors of the economy such as knowledge economy, technology and e-commerce.

The Positives

+ Portfolio occupancy up 1.5ppts YoY from 91.7% to 93.2%, led by Singapore (+1.8ppt), Australia (+1.8ppt) and the US (+1.6ppt). UK occupancy dip of 0.8ppt due to non-renewals. Singapore’s occupancy improved 1.8ppts YoY to 90.2% due to better leasing at business parks and logistics assets. 70% of demand was driven by tenants in the IT & data centres (25.5%), biomedical (24.6%), engineering (11.4%) and chemicals (8.5%). Australia’s +1.8ppt occupancy gains were driven by logistics assets. US occupancy increased 3.1ppts QoQ from 91.4% to 94.5% due to the improvement in occupancy of its newly acquired logistics portfolio. The portfolio of 11 logistics assets was acquired in Nov 21 at an acquisition occupancy of 92.6%. AREIT managed to lease out all the vacant space by end-Dec.

+ FY21 average portfolio reversions were positive at 4.5% (FY20: 3.8%). Reversions in Singapore came in at 2.9%, positive across all asset classes. Business parks (+2.9%) captured demand from new economy industries such as tech, biomedical and chemical, as well as government tenants. Reversions for logistics came in at +4.4%, pulling demand from 3PL tenants. Reversions for US business parks came in at +22.6% due to under-market passing rents while UK data centres delivered +6.2% reversions.

The Negative

– Delays in AEI/development timelines with slight cost escalations. Labour, supply chain constraints and cost of compliance with healthy-safety requirements for projects undergoing construction during the pandemic has led to delays and slightly higher construction cost. Delivery of some projects have been pushed back between 1-4 quarters, such as the redevelopment of iQuest, which has been delayed from 4Q23 to 4Q24. Projects completed in FY21/22 delivered ROIs close to their initial projections. Initial projected ROIs for the Grab build-to-suit and the redevelopment of UBIX were 6.1% and 7.7% respectively and were completed on 30 Jul 21 and 7 Jan 22, with ROIs of 6.0% and 6.7% respectively.

Outlook

Possible NPI margin compression due to cost inflation. Energy costs are likely to fluctuate upwards as most of AREIT’s electricity is generated from fuel sources. The management estimates that electricity costs, which accounts for c.20% of OPEX, could increase by 50-70% in FY22. As there are no fixed rates or bulk discounts available to hedge the rising electricity costs, the management will try to offset the higher electricity costs through cost containment measures. Tenant leases have clauses which allow the adjustment of service costs, providing AREIT possible recourse to pass through higher inflation driven OPEX.

Leveraging scale to drive value. AREIT’s AUM as at 31 Dec 21 stands at S$16.3bn, comprising 217 properties. Asset concentration risk is low, with its largest assets, Galaxis, representing 4.3% of revenue. Given the size of its asset base, AREIT’s sizable debt headroom of S$4.8bn to reach 50% gearing allows it to take meaningful strides into new asset classes in overseas markets, while its low asset concentration risk allows it to undertake AEIs and redevelopments without significant impact to earnings. During the year, AREIT completed S$2.1bn of acquisitions/developments and S$23.3mn of asset enhancement initiatives (Figure 1). It also divested five properties for total sales proceeds of S$247.9mn. There are six AEIs and redevelopments ongoing worth S$647mn (Figure 2), expected to be delivered between 1Q22 to 2Q25. From AREIT’s prior experience, refreshed properties have enjoyed higher-than-market take-up rates.

Ninety percent of AUM are new economy assets such as business space, high-spec assets, data centres and logistics properties. “Old economy” assets such flatted factories and light industrial assets represent 6% of AUM. Some of these assets are in prime industrial areas such as Tai Seng and Serangoon and could receive some convert-to-suit demand or be redeveloped into new economy assets such as data centres or high spec properties. The management will try to secure one of the data centre licences from the government in the near future. Repositioning of assets, such as converting light-industrial assets to high-spec asset, allows AREIT to command higher rents and keep its portfolio future ready.

Maintain BUY, DDM TP lowered from S$3.65 to S$3.52

FY22-25e DPUs dip 2.1-49% after factoring in higher OPEX. Our DDM-based TP is lowered by 3.6% to S$3.52 due to lower DPUs and higher COE of 6.12% (prev. 6.0%), after factoring a higher risk-free rate. AREIT remains our top pick for the sector in view of its scale and diversification. The REIT also continues to forge a future-ready portfolio by increasing its exposure to growth sectors of the economy such as knowledge economy, technology and e-commerce.

Source: Phillip Capital Research - 14 Feb 2022