Improving DPU, portfolio metrics
AAREIT delivered a strong 2Q22, with DPU up 25% YoY/11% QoQ, underpinned by better portfolio occupancy and rental reversion. Fundamentals are improving with buoyant logistics demand (c.50% of gross rental income). We raised FY23-24 estimates by 2% on stronger rental growth assumptions, and our DDM-based TP to SGD1.65 (COE: 7.4%, LTG: 1.5%). The Woolworths’ acquisition, set to complete in two weeks, should lift its Australian contribution from c.22% to c.38% of AUM, boost DPUs by 4-5%, and strengthen income visibility. For now, valuations are undemanding at 6.7% FY22E DPU yield, and 1.0x P/B. BUY.
Recovery in revenue, NPI, on +2.1% rental reversion
Revenue jumped 9.6% YoY / 5.1% QoQ, while NPI rose 15.5% YoY/ 6.7% QoQ in 2Q22. Its 1H22 revenue and NPI at +13.0% YoY and +19.4% YoY respectively, was driven by the rental contribution of 7 Bulim Street (acquired in Oct 2020), as well as higher revenue from 20 Gul Way, 8 & 10 Pandan Crescent, and 541 Yishun Industrial Park A (with the commencement of a new master lease in Jan 2021). The portfolio rental reversion of +2.1%, from +0.4% in 1Q22, is in line with our expectations; and we see it improving into 2H22.
Better occupancies, underpinned by demand growth
Portfolio occupancy rose to 97.3%, from 95.7% in 1Q22 and 95.4% in 4Q21, above the 90.1% Singapore market average. The improvement was broadbased, and led by (1) its industrial segment, which saw occupancy increase QoQ from 94.5% to 97.5%, from 15 Tai Seng (71% to 99%), and 135 Joo Seng Road (78% to 91%), and (2) warehouse, which rose from 97.0% to 98.1%, from 3 Toh Tuck Link (44% to 83%). We expect vacancies to remain tight, with leasing enquiries picking up against a backdrop of recovering demand fundamentals.
AUM up from Australian assets
Leverage was lower at 24.7% (from 33.9% as of end-Mar 2021), due to the SGD250m perpetuals at 5.375% that was raised in Aug 2021. Its AUM rose 2.2% HoH to SGD1.75b, largely from a valuation uplift from the Australian properties (Optus Centre and Boardriders APAC HQ). We expect gearing to rise to c.39% after the Woolworths deal, and to c.41% with 315 Alexandra Road (expected before end 2021). Its balance sheet remains sound, and we expect management could look to add further in its core markets.