- AAREIT is riding secular demand for logistics and warehousing facilities from e-commerce.
- Portfolio occupancy of 95.4% is above industry average of 90.0%.
- Prefer the AAREIT 5.65% perpetual bond with a yield to call of 4.3%.
Company background
Listed on the main board of the SGX in 2007, AIMS APAC REIT (AAREIT) owns S$1.85bn of industrial real-estate assets throughout the Asia Pacific: 26 in Singapore, one in the Gold Coast and one in New South Wales, Australia.
The logistics and warehouse segment comprised 52% of its 4Q21 gross rental income. This segment helped AAREIT achieve total portfolio occupancy of 95%, considerably above Singapore’s industrial-sector average of 90%. Leasing of logistics and warehouse assets remained robust, with AAREIT renewing 14% of its leases by gross rental income in 4Q21 alone compared to the 22% of leases expiring in the whole of FY21.
AAREIT’s low aggregate leverage of 34% provides ample headroom for growth opportunities. AAREIT has an investment-grade rating of BBB- by S&P.
Investment merits
Portfolio occupancy of 95.4% above industry average of 90.0%
AAREIT’s portfolio occupancy outperforms industry averages across the asset types (Figure 1), according to JTC data in 1Q21. AAREIT’s 5ppt outperformance can be attributed to its high allocation to high-quality logistics and warehouse assets, which made up 52% of its 4Q21 gross rental income.
Logistics and warehouses have been in high demand since the outbreak of the pandemic. Their rents are expected to grow at 1.3% YoY in 2021 and a CAGR of 1% over the next four years, up from -2.6% in the past five years. Their main propeller is e-commerce, whose demand is rising over the long term.
AAREIT is also getting more leasing enquiries for its properties in western Singapore, which made up 28% of its FY20 gross rental income. This is amid the commencement of Phase 1 of the Tuas mega-port, which is slated to open two berths this year.
Figure 1: AAREIT’s occupancy levels are significantly higher than industry averages
Source: Company
Income visibility and stability from master leases with long expiries
AAREIT’s key master leases are significantly longer than the average of 3-5 years for industrial real estate in Singapore. Its largest tenant, Optus Administration Pte Ltd, accounted for 13% of its 4Q21 gross rental income. Twelve years remain for the master lease of Optus, which fully occupies Optus Centre in New South Wales, Australia. AAREIT has a 49% stake in Optus Centre.
In Singapore, AAREIT’s third-largest tenant, KWE-Kintetsu World Express, contributed 7.8% to its 4Q21 gross rental income. KWE-Kintetsu has a 10-year master lease that will only expire in four years’ time. Its master lease also comes with a 5-year optional extension.
While master leases may reduce the potential for higher positive rental reversions, they offer better cashflow visibility and stability. Master leases made up 34% of AAREIT’s 4Q21 gross rental income.
Solid balance sheet for growth
As at 31 March 2021, aggregate leverage of 33.9% was substantially below the regulatory limit of 50%. This provides ample headroom for acquisitions and asset enhancements. Headroom remained high even after gearing climbed to an estimated 38% after its yield-accretive acquisition of 315 Alexandra Road, a S$102mn light-industrial property funded fully with debt.
At a gearing at 38%, AAREIT is still able to increase debt by S$330mn or 55% before reaching the 50% gearing limit. Interest coverage was healthy at 4x in 4Q21, up from 3.8x the previous quarter. Available undrawn credit facilities amounted to S$135mn or 23% of total debt.
Summary
With its solid balance sheet, AAREIT is in a position to capitalise on opportunities from secular demand for logistics and warehouse properties from e-commerce and stockpiling. The group has 500k sq ft of unutilised plot ratio for potential value-unlocking and the delivery of further asset-value growth.
We prefer its AAREIT 5.65% perpetual bond. There are three AAREIT bonds outstanding as of 12 July 2021. With an indicative ask price of 105.20, the AAREIT 5.65% perpetual bond offers a yield to call of 4.3%. This is a 0.3% spread above FTSE ST REIT Index’s trailing 12-month yield of 4.0% and 1.4% below AAREIT’s dividend yield of 5.7%, based on its FY21 dividend payout. The bond is callable on 14 August 2025 and has a dividend stopper feature offering further protection for bondholders’ coupons.
Risks
Unexpected defaults by master-lease tenants. Master leases comprised 34% of AAREIT’s 4Q21 gross rental income. Two of AAREIT’s top three tenants by gross rental income are on master leases. Any defaults by these tenants will affect occupancy and income visibility. That said, the REIT’s tenants are from the relatively resilient telco and logistics sectors.
Land-lease expiries in Singapore pose a risk to asset values. Industrial assets in Singapore have short land leases. As the leases approach their expiry dates, their asset values may decline. However, AAREIT’s long weighted average land lease of 34.6 years mitigates this risk. Its leaseholds only begin to expire 15 years later, of which only 20% of net lettable area is expected to expire in 15-20 years.
High industrial space supply could dampen rents. Between 2022 and 2024, an additional 2.8mn sqm of industrial space is expected to be completed. This amounts to an average annual supply of 1.4mn sqm from now until end 2024. As a comparison, the average annual supply and demand of industrial space were around 0.6mn sqm and 0.7mn sqm respectively over the past three years. Rents may be hit if supply outstrips demand. Mitigating this is the accelerating growth of e-commerce, which should underpin demand for logistics and warehouse facilities.
Appendix
Figure 2: AAREIT’s Singapore portfolio
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Figure 3: AAREIT’s portfolio breakdown by GRI
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Figure 4: AAREIT top 10 tenants
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Figure 5: AAREIT lease expiry profile
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Figure 6: AAREIT debt maturity profile
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