AIMS APAC REIT - DBS Research 2022-10-27: Portfolio Valuations Supported By Strong Underlying Rents

• AIMS APAC REIT (SGX:O5RU) announced its 1H23 (Jul to Sep 2022) earnings on 26 Oct 2022. See AIMS APAC REIT's announcement.

1H23 DPU of 4.70 cents.

• AIMS APAC REIT (SGX:O5RU)'s announced 1H23 DPU of S$0.0470, which forms ~55% of our FY23 DPU projections.
• Higher revenues and NPI mainly from Woolworths HQ acquisition and higher rental income from Singapore portfolio. 1H23 DPU is ~0.9% higher y-o-y if one-off reversals in 1H22 were excluded.

Positive rental reversions of +6.2% in 2Q23, +8.1% for 1H23.

• AIMS APAC REIT reported continued positive rental reversions of +6.2% in 2Q23 (compared to +9.5% in 1Q23).
• 2Q23 portfolio occupancy remained healthy at 97.5%. It was, however, 0.4ppt lower q-o-q due to a dip in occupancies in the Singapore portfolio. The dip in occupancies came mainly from logistics & warehouse and light industrial segments, and mainly due to transient leasing, as a high proportion of AIMS APAC REIT’s portfolio comprise multi-tenanted assets. Demand for logistics facilities remains robust, driven by demand from the food industry, 3PLs, and electronics sector.
• AIMS APAC REIT executed ~53,000sqm of new leases and renewals in 1H23. New sources of demand continue to come from the consumer and retail product, logistics, and engineering sectors.
• ~7.4% of portfolio leases will be expiring in 2H23, Bulk is from the logistics & warehouse segment (5.2% of the 7.4%), which could continue to benefit from the upside in rents.

Portfolio valuations inched up slightly in local currency terms.

• AIMS APAC REIT's portfolio valuations increased ~0.9% in local currency terms (as compared to March 2022). However, in S$ terms, valuations dipped ~2.4% due to the weaker AUD vs S$.
• Property cap rates remained relatively stable; higher valuations mainly due to higher underlying rents. Valuation uplift came mainly from logistics & warehouse and hi-tech space segments.
• Could see some softening in cap rates in Australia, but higher rents should be able to maintain valuations.

Financing costs inched up to 3.0%

• AIMS APAC REIT's gearing remains very healthy at 36.5%.
• Financing costs inched up 30bps q-o-q to 3.0%, mainly due to higher interest rates on floating loans.
• No refinancing due in FY23, with the next loan (a S$30m AUD loan) maturing only in FY24.
• 88% of loans remains hedged to fixed rates. Every 25bps hike in interest rates will have a ~1.0% downside impact on AIMS APAC REIT's DPU.

Our thoughts on AIMS APAC REIT

• Despite fears of expanding cap rates, AIMS APAC REIT’s portfolio valuations held up due to stronger underlying rents. Although portfolio valuations recorded a slight dip, it was due to the weakening AUD vs S$, and valuations in local currency terms were, in fact, ~0.9% higher.
• AIMS APAC REIT's 2Q23 DPU was higher q-o-q due to stronger earnings and formed ~55% of our FY23 forecasts. However, we are mindful of AIMS APAC REIT’s financing costs creeping up due to the spike in interest rates.
• Looking ahead, AIMS APAC REIT plans to focus their efforts on organic growth and potentially explore more AEIs or redevelopment projects. Its healthy gearing of only 36.5% allows it ample debt headroom to fund such initiatives.
• We understand that it is unlikely that AIMS APAC REIT will be looking at further acquisitions in the near term due to the volatility in borrowing costs and negative cap rate spreads in Australia.
• We have taken the opportunity to revisit our projections and have assumed higher risk-free rates and financing cost assumptions. Our target price for AIMS APAC REIT is lowered to S$1.40 mainly due to the assumption of higher borrowing costs.
• Despite the lowering of our target price, AIMS APAC REIT is still expected to generate an attractive forward yield of more than 7.4%. As such, we will be maintaining our BUY recommendation.