AIMS APAC REIT (SGX:O5RU): Buy the dip?

Following the announcement of Koh Wee Lih’s resignation as the chief executive officer (CEO) and executive director of AIMS APAC REIT (AA REIT), its share price dropped sharply. It was down by approximately 12% at the point of writing.

The management reported in the media that Mr. Koh will be stepping down after almost eight years as CEO to “pursue other professional interests” and Russell Ng will take over the position.

So, what went wrong? Was there an internal disagreement about the company’s direction? Is this a sign that something crucial is about to happen to the company? Is it possible that the market does not yet trust the new CEO?

As investors, we should avoid making such speculations and instead look at the company’s fundamentals and management. But before I explain any further, let’s get the elephant out of the room.

I searched the web but I couldn’t find any substantial info to explain the price drop. But I learned Mr. Koh started working at AIMS APAC as the Manager in 2008 and he became the director in 2014. Looking back, he has been with the company for a long time, which provides unitholders with some certainty. I’m sure his resignation has left many puzzled.

On the other hand, his successor Rusell Ng is relatively young at 40, but he is no novice. Despite only joining AIMS APAC in 2020, Mr. Ng has over 18 years of expertise in real estate investments, asset management, and corporate financing in Asia and Australia. Prior to joining the company, he worked in senior fund management and investment positions for several listed REITs and private equity funds, including Lendlease, AEP Investment Management, and Mapletree Logistics Trust. However, even with this info, we still can’t construct a clear picture of what caused the decrease in share prices.

So, let’s put all of that aside and focus on the company’s fundamentals instead.

AIM APAC REIT’s business

AIMS APAC REIT is an industrial REIT listed on the SGX since April 2007. Currently, the REIT has 26 properties in Singapore and 2 properties in Australia.

As shown in the figure above, Singapore accounts for majority of AA REIT’s portfolio and gross rental income. The logistics and warehouse industry, which remained resilient during the pandemic, accounts for over half of its portfolio. The remaining half consists of Business Parks, General Industrial, Light Industrial, and Hi-Tech Space.

Interestingly, a large proportion of AA REIT Singapore properties are held through Jurong Town Corporation on a leasehold basis. As such, the Manager stated in its financial report its intention to rebalance its portfolio to freehold assets to minimise the impact of shortening land tenure. In other words, AA REIT will be expanding its overseas operations, most notably in Australia, in the coming years.

Another great development is that AA REIT was recently included in the FTSE Russell ST Singapore Shariah Index and the MSCI Singapore Small Cap Index. This is a significant milestone for the REIT, and it is anticipated to raise its overall awareness and increase its trading liquidity.

AIM APAC REIT’s Revenue

Given that Logistics and Warehouse account for 50.5% of AA REIT’s portfolio by Gross Rental Income, its revenue during the pandemic remained resilient compared to other REITs.

AA REIT’s gross revenue for FY2021, which was at $112.6 million, decreased by 5.2% from FY2020’s $118.9 million gross revenue. This was primarily due to the rental relief it provided tenants affected by the pandemic, the lower contributions from its international business park due to the conversion of master leases to multi-tenancy leases, and the expiration of the previous master lease at 541 Yishun Industrial Park A in April 2020. It’s worth noting that a new master tenant for 541 Yishun only started paying rent in January 2021, almost a year after the previous tenant.

On the plus side, AA REIT has started collecting full-year contributions from Boardriders Asia Pacific HQ (acquired in July 2019), the recently refurbished 3 Tuas Avenue 2 (from March 2020 onwards), and 7 Bulim Street (purchased in October 2020). All of these help smooth out the effects of the pandemic.

Moving on to its latest earnings report, we can see the REIT heading to general recovery. Its FY2022 Q1 gross revenue was $31.8 million, which is 16.8% higher than the previous year. Likewise, its net property income improved by 23.9% with a total amount of $23.1 million. However, we should also take note that this massive improvement stems from a low base.

Assuming AA REIT was able to maintain its earnings in the next three quarters, we can expect its gross revenue to be roughly at $127.3 million, which is a 7% improvement compared to the pre-pandemic level. This is a great number, but it is not as impressive at first glance if we only consider its FY2022 Q1 results.

AIM APAC REIT’s Occupancy rate

Over the past three years, AA REIT’s occupancy rate wasn’t consistent, but this is undoubtedly an effect of the pandemic so we shouldn’t penalise it too much.

Comparing its total industrial occupancy rate for 2021 Q2, which was 90.1%, according to JTC, AA REIT performed admirably. With this, we can infer that AA REIT’s 95.4% occupancy rate for FY2021 is higher than the industry average and its assets are of higher quality.

Tenant base

AA REIT’s portfolio is backed by 188 tenants across 28 properties in Singapore & Australia and comes from a wide range of industry sectors. Seven out of its top ten tenants come from resilient sectors such as logistics & warehouse, biomedical & life science, telecommunications & data centre operators.

Nonetheless, its top 3 tenants make up a relatively large chunk of its gross rental income. Its top 3 tenants and the percentage of their contribution are as follows:

• OPTUS (12.7%),
• illumine (8.3%), and
• KWE (8%).

As of June 2021, AA REIT’s weighted average lease expiry is 3.98 years. Looking at its lease expiry profile, it’s clear that the leases are evenly spaced out throughout the years.

On the footnote below the chart (I’m not sure you can read the tiny text), it states that its weighted average rental for renewal leases has decreased by 0.4%, which could indicate sluggish demand for industrial space.

AIM APAC REIT’s Dividend Yield

According to the chart, the total distribution has been growing at a CAGR of 5.5%. In my opinion, this is a bit misleading. If we look at only the last five years, the entire distribution CAGR is -2.15%, not the positive amount shown in the graph. The last five years of its DPU growth were the poorest, with a -4.13% CAGR.

Looking at FY2021 alone, the total distribution per unit was 8.95 cents, which is lower than FY2020. In its financial report, it attributed the lower net property income to the amount reserved for distribution to its Perpetual Securities holders and the management fees fully paid in cash for FY2021.

Cash Payment of Management Fees raises some questions

Paying the management fees fully in cash spiked my interest because REIT managers are commonly paid in REIT shares, which tends to give comfort to investors. As such, I checked its FY2020 report and also found a similar trend. The drop in distribution income was partially attributed to a higher proportion of management fees paid in cash for FY2020 than in FY2019.

With this knowledge, we need to ask: why is the management doing this? Don’t they trust the REIT they are managing? Do they know something that we don’t? Or was this caused by a recent change in policy?

I believe this is something we need to monitor closely as we certainly do not want to invest in a REIT that the Manager has no strong conviction in.

AIM APAC REIT’s NAV

As of 30 June 2021, AA REIT’s NAV is 1.35 per unit, which is slightly lower than the start of the year.

Observing the trend in the last three years, AA REIT’s NAV seems to have remained stagnant with the following figures: 1.34 (2019), 1.35 (2020), 1.36 (2021).

AIM APAC REIT’s Debt

As of 30 June 2021, AA REIT has a healthy leverage of 34.3%, which is low compared to the regulatory limit of 50%. However, we should also note that AA REIT has been issuing perpetual securities recently, which is sort of like debt, but it is categorised as equity on the balance sheet.

Its interest coverage ratio is also 4.3 times, which shows that the REIT would most likely be able to pay up its debt obligations with no issues.

AA REIT’s debts are also well spread out, as shown above. With the commitments obtained to refinance several of its secured debt facilities due in 2020 and 2021, AA REIT’s weighted average debt maturity is around 3.3 years.

Strong Sponsor

AA REIT’s sponsor is AIMS Financial Group. To give you some background, AIMS was established in 1991 and is a diversified financial service and investment group active in mortgage lending, securitization, investment banking, funds management, property investment, private equity, venture capital, stockbroking, and high-tech investment.

While there isn’t much information about the sponsor, it is interesting to note that AIMS Financial group was responsible for AA REIT’s (formerly known as MacarthurCook Industrial REIT) positive turnaround. AIMS helped the distressed REIT back in 2009 and turned it into what it is today, and this speaks well of the sponsor.

Furthermore, we can see that the cost of AA REIT financing has decreased over the last three years, from 3.6% in 2019 to 3.0% at present. Because of the lower financing costs, we can infer that AA REIT has a solid sponsor.

AIM APAC REIT’s Potential Growth

Apart from diversifying its assets to freehold properties overseas, AA REIT has also identified redevelopment opportunities for its existing properties. As shown in the image above, these properties make up a large portion of its current portfolio. While this may indicate that the REIT has a lot of room for expansion, it also raises the question: why does it have so much underutilised space in the first place? Why are they only doing something about it now?

AIM APAC REIT’s Perpetual Securities

I personally find companies that use perpetual securities complicated. For those unfamiliar, perpetual securities are like bonds with no maturity date and issuers technically don’t have to pay back the principal amount. Because of such mechanisms, perpetual securities are treated as equity in the balance sheet, which sometimes gives investors the wrong picture.

Recently, AA REIT issued another round of perpetual securities under the S$750 million Multicurrency Debt Issuance Programme, established on 30 November 2018 to raise $250 million. I couldn’t find the official statement on SGX or any additional info since the announcement on 23 August. But based on the trend of the previous rounds of perpetual securities issues (after the issuance of the $125 million or 5.65% perpetual securities, it announced the acquisition of a logistics facility at 7 Bulim Street), we can possibly expect an announcement of an acquisition soon.

AIM APAC REIT’s Valuation

Price to Book

Following the recent earnings, the share price of AA REIT rebounded with positive market sentiment. Its current price to book is 1.05, which is slightly higher than its average of approximately 1. This may indicate that AA REIT is currently trading at a fair valuation.

Compared with Mapletree Industrial Trust (Orange), AA REIT’s share price seems to have stagnated over the years. With Mapletree’s price to book at 1.65, AA REIT looks attractive. But is this a fair comparison? I believe Mapletree’s assets are of higher quality, which justifies its higher valuation.

When compared with ESR REIT (Purple), it seems much fairer since their PB appears to move in tandem. With ESR REIT’s current PB of 1.2, it shows that AA REIT currently has a reasonable valuation.

Dividend Yield

AA REIT’s current dividend yield is around 6.26%, compared to its 7-8% historical average. This may be an indication that it is slightly overvalued now.

It is also worth noting that AA REIT’s payout ratio has been greater than 100% for most years, which may not be sustainable.

My Opinion

If you were to ask me, would I invest in AA REIT? The short answer is no.

Let me explain why.

First of all, I believe its fundamentals are not as robust as other REITs. AA REIT’s revenue has been stagnant for a few years, while other REIT’s revenue in the same sector has grown.

Next, compared to more well-known REITs such as Mapletree and Capitaland, I believe there is insufficient information about this REIT. As a result, I’m unable to effectively determine the REIT’s prospects so I think it is best to avoid it.

Thirdly, there is some speculation (I repeat – speculation) of a potential merger with ESR in the works. When this happens, will it be good or bad news for investors? Will its stock price skyrocket or plummet? Well, there’s a lot of uncertainty now and I don’t like that.

It’s true that AA REIT has a higher yield than Mapletree and Capitaland, but I do not think the 1-2% increase can justify the added risk of investing in this REIT.

And nobody likes it when their stock holding tanks like AA REIT did. Christopher Ng retired at 39 and now lives on his dividend income. If anyone has to be right about a REIT or a dividend stock, it has to be him. Join him to learn how he manages his dividend portfolio that was built solely on Singapore stocks.