Results First Take: 3Q22 – Strong operating metrics
- Acquisition of Woolworths HQ in Sydney has been completed on 15 Nov 2022
- NPI and DPU increased y-o-y mainly due to acquisition of Woolworths HQ as well as better performance at several properties
- Continued positive rental reversions of +0.2% mainly coming from leases at logistics properties
- Maintain BUY with TP of S$1.60
| Key operational data | 3Q2022 | 2Q2022 | %q-o-q | 3Q2021 | % y-o-y |
| Revenue | 37 | 33 | 10.1% | 32 | 14.5% |
| NPI | 27 | 25 | 10.0% | 24 | 14.8% |
| DI | 17 | 18 | -5.6% | 14 | 15.3% |
| DPU (Scnts) | 2.35 | 2.50 | -6.0% | 2.05 | 14.6% |
| Portfolio occupancies | 97.6% | 97.3% | 0.3% | 95.7% | 1.9% |
| WALE (years) | 4.9 | 4.0 | 0.9 | 3.9 | 0.9 |
| Rental reversion | 0.2% | 2.1% | N.A. | 1.1% | N.A. |
| Aggregate leverage | 37.3% | 24.7% | 12.6% | 34.1% | 3.2% |
| Interest Coverage Ratio | 5.3 | 4.5 | 0.8 | 3.8 | 1.5 |
(+) Completed acquisition of Woolworths HQ in Sydney
- Acquisition of Woolworth HQ for S$454m completed on 15 Nov 2022
- Fully funded by debt and proceeds from issuance of perpetual securities
- S$250m in perps at 5.375% were issued in September 2021
- Long WALE of 10 years and post-cost NPI yield of c.4.8%
- 100% occpancy
(+) Revenue and NPI increased by more than 14% y-o-y
- 3Q22 revenue of S$36.8m was 14.5% higher y-o-y
- Mainly due to additional income contribution from Woolworths HQ (acquisition completed on 15 Nov 2021)
- Also from higher revenue from 20 Gul Way, 27 Penjuru Lane and 541 Yishun Industrial Park A
- 3Q22 NPI of S$27.1m was 14.8% higher y-o-y
- On a q-o-q basis, revenues and NPI were c.10% higher mainly due to the 1.5 months of income contribution from Woolworths HQ
(+) 9M FY22 DPU of 7.10 Scts. makes up 82% of our FY22 projections
- 3Q22 DPU of 2.35 Scts. was 14.6% higher y-o-y, but 6.0% lower q-o-q
- Lower q-o-q DPU mainly due to the timing difference between the issuance of perpetual securities and completion of Woolworths HQ
- Perps were issued on 1 Sep 2021, while Woolworths HQ was only completed on 15 Nov 2021
- 9M FY22 DPU of 7.10 Scts. came in above our projections, forming 82% of our FY22 projections
(+) Portfolio occupancy inched up to 97.6%
- 3Q22 portfolio occupancy inched up 0.3% q-o-q to 97.6%
- Portfolio WALE also saw a q-o-q improvement from 4.0 years to 4.9 years
- Occupancy and WALE improvement mainly due to addition of Woolworths HQ
- 10 new leases signed and 8 new leases renewed in 3Q22
- Positive rental reversions of +0.2%
- New leases mainly came from logistics tenants signed at 11 Changi South Street 3, 56 Serangoon North Ave 4, and 20 Gul Way
- Only 7.1% of portfolio due to expire in the next quarter
- Bulk of the remaining expiry (c.5%) will come from 29 Woodlands Industrial Park E1, a hi-tech industrial space
(+) Healthy capital management metrics
- Gearing increased to 37.3% due to additional debt taken to fund the Woolworths HQ
- Still within a very comfortable level and AAREIT has ample debt headroom remaining
- Undrawn committed facilities and cash in excess of S$237m
- All-in borrowing costs remain stable at 2.8%, but percentage of fixed rate debt declined from 98% to 57%
- Borrowing costs may inch up as AAREIT works to hedge more of its borrowings to fixed rate
Our views
As anticipated, there was a slight dip in DPU on a q-o-q basis due to the timing difference between the issuance of perps and the completion of the Woolworths HQ acquisition. However, 3Q22 DPU surprised on the upside and 9M FY22 DPU of 7.10 Scts. represents 82% of our FY22 projections. Portfolio metrics remain healthy with a slight inching up of overall occupancy rate to 97.6%. Portfolio WALE was also significantly extended to 4.9 years with the addition of Woolworths HQ (fresh 10 year lease). Only 7.1% of portfolio leases will be due to expire in the next quarter and we anticipate that AAREIT will be able to renew leases with potential for some positive rental reversions.
We continue to await further updates on the acquisition of 315 Alexandra Road and we understand that AAREIT is still waiting for approval from the relevant authorities. The acquisition was announced exactly one year ago (on 27 Jan 2021) and it seems like there may be further delays. The option to acquire has been extended by a further 3 months to until the end of April 2022. Despite this, AAREIT continues to report strong earnings as its portfolio enjoys high occupancies and continued positive rental reversions.
We will be maintaining our BUY recommendation with TP of S$1.60.