Fundamentals remain strong
(+) Revenues and NPI grew c.30% y-o-y
- 1Q23 revenues increased 29.8% y-o-y to S$41.3m
- NPI improved 34.4% y-o-y to S$31.0m
- Increase is mainly attributed to income contribution from Woolworths HQ acquired in November 2021
- Annual rental escalations support some organic growth in earnings as well as offset some inflation in operating expenses
- 68% of AUD income has been hedged on a forward 12-month rolling basis
(+) Strong positive rental reversions of 9.5%
- Positive rental reversions of 9.5% in 1Q23
- Mainly coming from lease renewals at warehouse and logistics properties
- For the remaining 11.3% of leases due to expire in FY23, at least 70%-80% of these expiries are coming from the warehouse and logistics segments
- Expect both segments to continue undergoing positive rental reversions
- More than 80% of the leases expiring in FY24 are also from the warehouse and logistics segments
(+) Warehouse and logistics segments to continue driving rental growth
- Warehouse and logistics segments continue to outperform other property segments
- All eight leases renewed in 1Q23 posted positive reversions, with a renewal leading to as high as a c.26% uplift
- Rental reversions for the other segments such as business parks and light/general industrial were mixed
- Remaining six leases renewed in 1Q23 range from low single digits to slightly negative
- However, leases from these segments only make up a small portion of renewals
(+) All-in funding costs maintained at 2.7%
- S$140m of debt maturing in FY23 and FY24 have been early refinanced at very favourable rates
- Refinanced rates were c.20bps lower than previous rates
- Next debt maturity is only S$31m in FY24
- The 65% of loans that are hedged to fixed rates will increase to 88%, including loans that were refinanced early
- Average tenor of interest rate swaps is c.3 years
- Expect financing costs to remain fairly stable in the near to medium term
(-) Option to purchase 315 Alexandra Road has lapsed
- AAREIT has allowed the purchase option to lapse following delays of more than 1.5 years
- AAREIT will still be interested to acquire the property if the regulatory approvals are given. However, the deal metrics have changed significantly over the past 1.5 years
- Occupancy rates have declined, lease structures changed, etc.
- AAREIT’s assumptions, such as for cost of debt and funding structure, have also changed
(+) Forward hedging of income sourced in AUD
- AAREIT continues to hedge c.70% of its AUD income on a 12-month forward rolling basis.
- This helps to provide income visibility and ensure earnings stability despite concerns of the strengthening SGD
Our thoughts
Overall, AAREIT reported a healthy set of 1Q23 results. Revenues came largely in line with our projections, but DPU of 2.28 Scts was slightly below our estimates (24% of our full-year estimates), as some income from Australia has been retained. This has been a common practice for AAREIT, as retention is a prudent approach and bodes well for general working capital purposes. As with previous years, any unutilised retained income will be adjusted back towards the end of its financial year.
We have updated our estimates to remove the acquisition assumptions for 315 Alexandra Road. As the option has already lapsed and there is no clear indication if the acquisition will still materialise, we have removed it. Previously, we have assumed that the c.S$102.0m acquisition will be concluded in 2H23 and contribute half a year of income.
Despite the lowering of our earnings estimates, we remain comfortable with AAREIT’s underlying earnings. Its healthy portfolio occupancy and the built-in rental escalations continue to support an organic growth in earnings. Although inflation may put some pressure on some of its maintenance contracts, we understand that utility costs are fully recoverable from tenants. Its 1Q23 NPI margins of c.75.0% continue to trend above our estimates of c.71.5%. We believe that our projections have sufficient buffers in place and project that AAREIT is on track to deliver a forward yield of c.6.8% for FY23.
We will be looking out for further updates on AAREIT’s acquisition plans in FY23F, especially with regards to 315 Alexandra Road. With interest rates rising over the last few months, we believe it would be challenging to source for accretive acquisitions in Australia. However, there may still be opportunities available in Singapore. With tenants in the hi-tech manufacturing and logistics sectors still expanding, AAREIT could potentially look at built-to-suit opportunities or embark on major AEIs at its existing properties to tap into unutilised GFA as it caters to its tenants’ expansion needs.
As such, we will be maintaining our BUY recommendation despite a slightly lower TP of S$1.53.
