Improving portfolio metrics
AAREIT delivered a strong 3Q22 with DPU at +14.6% YoY/-6.0% QoQ, underpinned by higher portfolio occupancy. Fundamentals are improving on the back of demand recovery, which suggests a stronger rental reversion outlook for FY23E. AAREIT’s income visibility has been strengthened by the Woolworths acquisition, with a longer WALE at 4.85 years (from 3.98 years) and weighted average land lease expiry at c.57 years (from c.45 years). Our forecasts and DDM-based TP are unchanged at SGD1.65 (COE: 7.4%,
LTG: 1.5%), and see valuations as undemanding at 7.0% FY23E DPU yield, and 0.7x P/B. BUY.
Stronger revenue, NPI, better reversion in FY23E
Revenue jumped 13.5% YoY/10.1% QoQ while NPI rose 14.8% YoY/ 9.9% QoQ in 3Q22, with contribution from Woolworths HQ (from 15 Nov 2021), and higher income from 20 Gul Way, 27 Penjuru Lane, and 541 Yishun Industrial Park A (with the commencement of a new master lease in Jan 2021). Leasing momentum was strong at c.48k sqm or 6.1% of portfolio NLA, and were concentrated at its logistics assets, with c.84% driven by renewals. The portfolio rental reversion of +0.2%, from +2.1% in 2Q22, is in line with our expectation; and we see it improving into FY23E.
Higher occupancy, leasing momentum
Portfolio occupancy continued to trend up; it rose to 97.6%, from 97.3% in 2Q22 and 95.7% in 1Q22, above the 90.1% Singapore market average. We believe the improvement was broad-based, with a similar read-across from peers. Leasing enquiries are picking up against a backdrop of recovering demand fundamentals, and we expect vacancies to remain low, especially for its logistics and warehouse assets, which made up c.42% of 3Q22 gross rental income.
AUM up from Australian assets
Leverage rose to 37.3% (from 24.7% as at end-Sep 2021), following the completion of the Woolworths HQ acquisition, which pushed Australia’s contribution to c.39% of AUM. Discussions are ongoing for the 315
Alexandra Road property, with a 3-month extension sought for its completion. Its balance sheet remains sound, and we expect management could look to add further in its core markets, or lift returns from its Singapore redevelopment pipeline.