High occupancy, recovering rents
AAREIT’s FY22 DPU rose 5.7% YoY, underpinned by resilient portfolio occupancy, recovering rents and the Woolworths acquisition in Nov’21. The results were in line with consensus, and ahead of our estimate. We see strong fundamentals ahead, given the higher Australian business park contributions and improving rental growth outlook for its Singapore industrial assets. With rental recovery set to strengthen against demand growth and positive macros, we raised DPUs by 5-6%, and our DDM-based TP by 3% to SGD1.70 (COE: 7.0%, LTG: 1.5%). BUY.
Improving demand, reversion strong at +14.7%
Portfolio occupancy was maintained at 97.6% in 4Q22, driven by strong leasing momentum at 5.9m sf (vs 6.1m sf in 3Q22). AAREIT achieved a strong +14.7% rental reversion (vs +0.2% in 3Q22). llumina renewed its lease (at 29 Woodlands Industrial Park E1) for 10 years at a +16% reversion. This and others at 8 & 10 Pandan Crescent (at 4%-12%), helped to offset weaker reversion at 1A IBP (of -8%). Management expects NPI to be cushioned from higher utility costs, as they are mostly passed through to tenants for its triple-net leases.
Australian contributions set to rise
Contributions from its Australian assets rose to c.13% of FY22 revenue (from c.3% in FY21), and made up 39.6% of AUM (from 21.8%) following the Woolworths acquisition, while the portfolio WALE increased to 5.05 years (from 4.85 years at end-Dec 2021). We see sound growth fundamentals in Australia, with the assets anchored by its business parks (94% of Australian AUM). The properties are backed by resilient occupancies and built-in 2.75%-3.25% pa rental escalations for its two largest (blue-chip) tenants, which together contributed c.28% of gross rental income.
Sound balance sheet, cushioned from rising rates
Gearing was stable at 37.5% (vs 37.3% at end-Dec 2021) while borrowing cost fell to 2.7% (from 2.8%). AAREIT’s fixed-rate debt remains high at 92% (vs 98.1% in 1H22), and we estimate <1% DPU impact from 50bps higher interest rates. Its AUM rose 1.5% to SGD2.3b as valuations increased in Australia (at Optus and Boardriders) with cap rates compressing to 4.5% (from 4.8% in 1H22). The 415 Alexandra Road acquisition stop-date has been extended to 8 Jun 2022, with gearing set to rise to c.40% post-deal.