I don’t often look at this — have you heard of AIMS APAC REIT? I wrote it here last time.
This is a straightforward, Singapore industrial REIT – owns warehouses, storages and light manufacturing facilities.
The kind of properties where engineering, retail and food companies would lease spaces from.
What struck me, is not that it’s different from the bigger industrial landlords like Ascendas REIT or Mapletree Industrial Trust (both morphed into diversified properties including trendy business parks and data centre).
What struck me is, AIMS APAC REIT’s dividend is trading at a much higher yield than its blue-chip peers.
I’ve come to believe Singapore industrial REITs should trade at a higher yield.
That’s because these REITs own assets that sit on shorter, 30 years land leases.
Think about this.
After a land lease expires, AIM APAC REIT needs to raise fresh capital – usually from banks – to replace their existing assets and the land its properties sit on.
A REIT pays most of their profits as dividends. And a REIT can only borrow up to a fixed amount of debt.
So the next logical step is to raise more money from unitholders – through rights issue.
And part of what you collect as dividends from industrial REITS over the years, will be reinvested back into AIMS APAC REIT.
As it replaces properties whose land leases expire over time.
That’s why you need a much higher dividend yield to compensate for a rights issue.
But I’m not talking about short land leases today.
The thing is, last year, AIMS APAC REIT paid 9.41 cents of dividends, which makes its current yield of 7.6% pretty attractive.
Now, I enjoy a good dividend payout. But I also ask myself this – is its high yield safe from high interest rates?
Well, let’s find out then.
AIMS APAC REIT — A “Pure-Play” Industrial Singapore REIT
AIMS APAC REIT was listed on the SGX since 2007 – making it one of the longest public-listed REITs.
Today, it has 29 properties: 26 in Singapore, three in Australia – all worth S$2.2 billion.
It has 202 tenants, split across various sectors. After it bought over Woolsworth HQ in Australia, this makes Woolsworth its biggest tenant.
The thing is, these leases are almost as stable as hospital leases — long term and stable rising rent.
Usually, these industrial tenants stay on their leases for a long time once they found a good industrial space connected close to transport nodes and highways in Singapore.
AIMS APAC REIT’s average lease is seven years, which makes rental collection predictable — it also managed to retain 85% of their tenants.
At a mere market cap of S$897 million, this also makes AIMS APAC REIT a relatively undervalued REIT. That’s not the important point.
No big debt to refinance until 2027
I don’t know if it’s good foresight, or just plain fortuity.
AIMS APAC REIT’s management has refinance most of their debt, before the Fed hiked their interest rates.
Either way, this saved AIMS APAC REIT heck a lot of trouble when interest rates soared.
I found that AIMS APAC REIT doesn’t need to refinance most of its debt until at least 2027.
By then, I’d expect interest rates to cool off.
Or its rental income would have at least grown more than further rate hikes.
In fact, the only debt it needs to repay is a tiny A$30 million loan due next year – that’s only 3.7% of all its debt.
I’m sure AIMS APAC REIT don’t have to worry about borrowing debt with a high interest costs.
Here’s another thing.
88% of AIMS APAC REIT’s interest payment are hedged. What this means, is most of the interest it pays are already converted from a “floating” into a fixed-term rate.
Whether interest rates continue to go up, AIMS APAC REIT only needs to pay a fixed amount of interest on its debt.
Interest costs went up, but rent soared higher
When you look at AIMS APAC REIT’s financial results, this is where is gets really interesting.
Despite high interest costs, AIMS APAC REIT could still maintain their distribution per unit (DPU).
Actually, DPU rose marginally.
While this Singapore REIT pays a higher interest because of the Woolsworth HQ acquisition last year, the rent it collects from its properties all went up.
Put it this way, its latest financial results saw an 8.1% increase in rent.
And AIMS APAC REIT also don’t have to provide further rent relief for tenants.
This makes AIMS APAC REIT’s rent collection still strong.
Almost full house? growing portfolio occupancy
What I didn’t know — AIMS APAC REIT was its properties occupancy steadily grew from 93% to 97% over the last two years. This is unlike what we see in other REITs.
This is way higher than the average occupancy for JTC’s industrial assets.
At first glance, industrial properties aren’t exactly the kind of assets you want to own for the long term.
But what I was impressed, was AIMS APAC REIT has a strong track record of redeveloping improving their assets.
Just like CapitaLand Integrated Commercial Trust refurbished Funan Mall to increase the ex-electronics shopping mall’s value.
AIMS APAC REIT has actively improved its assets’ value by expanding the physical space through redevelopments.
Since 2011, it has expanded the size of their rental space for ten of their industrial properties, growing the assets’ value, occupancy and rental rates.
What’s more. the REIT has 21 new leases, and locked in another 26 renewal leases this year — mostly in retail, logistics and engineering.
But… Analysts still slashed AIMS APAC REIT’s target price — why?
I can understand why both DBS and RHB analysts have cut their target prices for AIMS APAC REIT.
Even though gearing is only at 37%, I don’t think AIMS APAC REIT is willing to increase their gearing, in case leverage gets too high.
Put it this way, if the REIT buys more properties, it will have to raise more shares than borrow debt at current gearing limit — not a good thing for unitholders.
According to DBS analysts, they said: “However, with gearing at already at optimal levels, we assume further growth will require some equity fundraising.”
I don’t quite agree.
As long as AIMS APAC REIT picks good properties, can raise the REIT’s dividend yield, I think it’s still worth buying more AIMS AAPC REIT shares through a rights issue. Just my two cents — but what do you think?
Final Thoughts – Is AIMS APAC REIT truly safe from rising rates?
I think AIMS APAC REIT’s current yield is probably more defensive to rising interest rates, versus other Singapore REITs.
See, it has pushed back debt repayment to at least 2027, which it doesn’t have to worry about refinancing at a higher interest costs.
What’s more, most of its interest rates are fixed. No matter rates go up or down, the REIT still pays a fixed interest cost on its current debt.
Lastly, it continues to redevelop and expand its physical leasing space. At the same time, locking more tenants into its properties.
Occupancy has also grown steadily over the last two years.
I don’t deny that you probably won’t see much capital gains in their shares considering industrial properties have a limited upside due to their short land leases.
But that does make up for a more stable dividend pay out from this industrial REIT.
One more thing…
Even though there might be a huge supply for single-user factories over the next few years, the overall industrial/logistics landscape in Singapore is still quite favourable for AIMS APAC REIT considering the longer term demand for warehouse, third-part logistics and high-value manufacturing.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan