AIMS Apac REIT (SGX: O5RU) is quite a story recently.
This Singapore REIT latest results have rebounded, its stock is trading at 7% dividend yield. So far, one of the highest yielding Singapore industrial REIT.
Update: AAREIT’s plan to acquire Sime Darby Business Centre fell through
Source: ShareInvestor Webpro, Dividend Titan
Why is AAREIT trading at such high dividend yield?
Anything wrong with the REIT?
Let’s dive in.
AAREIT: Background
At S$967 million market cap, AAREIT is a mid-sized logistics and warehouse REIT.
If I compares AAREIT to other well-known REITs, its property portfolio is similar to Mapletree Logistics Trust, ESR-LOGOS REIT and Sabana REIT.
AAREIT owns 29 properties in Singapore, and recently more in Australia. These are mainly logistics facilities, warehouses and business parks.
Source: AAREIT’s FY2022 Financial Filings
What’s remarkable is how AAREIT’s DPU showed a big improvement last year, after meagre performance since 2019.
Source: AAREIT’s FY2022 Financial Filings
In fact, total distribution and DPU grew 6.3% and 5.7% respectively.
Source: AAREIT’s FY2022 Financial Filings
Its latest results are driven by two things.
First, AAREIT recently bought a Australia freehold property — a business park for A$463 million (S$454 million).
What’s compelling is this property is already fully leased to Woolworth Limited, which is Australia’s largest supermarket chain with a 33% market share.
Even though Woolworth’s master lease expires in 2031, it has four more options to renew — each options extending the lease for another five years. This stabilizes AAREIT’s rental income.
Other than the Woolworth property, AAREIT’s two other Australia properties are also fully leased to Singtel’s Optus Australia in New South Wales. And the other fully leased to GSM by the Billabong Group. Both are high-quality tenants.
More crucially, its Australia portfolio helps diversify away from AAREIT’s Singapore-centric properties.
So far, its Australia portfolio contributes 39.5% to AAREIT’s portfolio.
Source: AAREIT’s FY2022 Financial Filings
For a AA REIT to hit 97% occupancy rate, it’s really good as a logistics REIT. This is much higher than the average occupancy rate in Singapore and Australia.
In fact, this is impressive for an industrial REIT.
Another big driver is this.
AAREIT’s existing Singapore properties have improved its rental income. Some of its existing properties, including the ones in 20 Gul Way, 8 & 10 Pandan Crescent, 29 Woodlands Industrial park and 541 Yishun Industrial Park A contributed higher rental adjustments upon tenant lease renewals.
AAREIT also saw a full year rental contribution of its 7 Bulim Street property.
Recall this property was only bought in October 2020, and so far contributed S$10.3 million in gross rental income.
That’s about 7% of AAREIT’s gross revenues.
Why AAREIT’s shares still stuck going nowhere?
Since 2013, AAREIT’s shares have traded around S$1.30. And its shares are pretty resilient, recovering quickly after the COVID scare in 2020.
Source: Yahoo! Finance
Singapore industrial REITs, as I’ve always understand, should trade at a much higher dividend yield than other Singapore REITs.
And the reason is simply mathematical.
The thing is, land that Singapore industrial properties sit on lasts for 30 years. After that, land gets returned back to the state.
As such, AAREIT needs to renew these land leases in order for the properties to continue operating.
A high dividend yield, in fact, helps compensate the cost to replace these properties.
For instance, AAREIT’s land leases, on average, expires in 57 years (including the freehold and 99-lease properties in Australia).
Source: AAREIT’s FY2022 Financial Filings
This means, on average, the value of AAREIT properties depreciate at a rate of 1.75% per year.
That’s the bad news.
The good news is, as long AAREIT’s dividend yield fairly compensates for the “invisible” depreciation charges on these short land leases, it still make sense to own industrial REITs.
Since AAREIT trades at 7% dividend yield today, and assume it continues to pay dividends at this rate, effectively, you’re truly keeping only 5.25% of dividend yield (7% minus 1.75%).
It’s still not too bad.
It’s worth noting the impact of short land leases in industrial properties. This is because, at some point, AAREIT will raise money (through rights issue) from shareholders to replace these expired properties. Also known as “capital call”.
That’s why AAREIT’s shares hardly move — there’s no appreciable value in Singapore industrial properties.
For instance, after 15 years, its 8 & 10 Pandan Crescent warehouse buildings only rose by 33% (see below).
No property price gain for its warehouse and logistics facility at 27 Penjuru Lane (see below).
AAREIT is smart about this
One way to mitigate these short land leases is to buy properties at a very high leveraged yield. I’ll explain.
In October 2020, AAREIT acquired a S$130 million 4-storey warehouse at 7 Bulim Street in Jurong Industrial Estate with an 8% property yield.
The property’s land lease expires in just 22 years. This means the 4-storey warehouse sitting on this land depreciates at a rate of 4.5% per year. That’s a huge annual charge to the property’s value.
This leaves AAREIT’s shareholders with a 3.5% yield on the property.
That’s not all.
AAREIT financed the entire property with debt.
So shareholders actually receive a much higher yield than just an outright 3.5% yield, which it pretty good for shareholders.
What’s not being said about AAREIT
Also, what’s not being said here is the headwinds that it’s going to be faced in Singapore.
You see, Single-user factory there’s going to be a huge supply coming online over the next few years.
In fact, between 2Q2022 and 2025, there’s going to be 4.4 million sqft of spaces. Which is quite a huge supply. The question is: will there be enough demand to fulfil the new supply coming up?
With the backdrop of supply chain disruption, rising rates slowing pockets of sectors, this could pose some weakness in rental adjustments during the next few years.
And could very well lower occupancy rates.
Final thoughts
If you want pure dividends, not having to worry about share price, then AA REIT is something interesting. This Singapore industrial REIT has dished heavy dividends for investors over the past few years.
What’s disappointing is the lack of share price movement. The good thing is this sort of acts as an almost bond-like stock — stable, doesn’t fluctuate much with the general stock market.
If you’re someone looking for growth, you probably want to give AAREIT a miss.
Moreover, its gearing ratio is at 37%, which means it probably can afford to expand 1-2 more properties before hitting the gearing ratio limit.
There’s still the headwinds coming from logistics oversupply, risky tenants and rising rates. AA REIT’s potential is sort of at its full capacity. While there’s some rebound in its DPU and improvement in profits, can’t really expect strong results going forward.
So far what I like is the dividend yield is fairly priced versus the other Singapore industrial REITs.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
Thanks, Willie.
AIMS Investment Group makes A$1.25 cash offer to AIMS Property Securities Fundhttps://sg.news.yahoo.com/aims-investment-group-makes-1-185956523.html
David
Thank you David for this info!
Just to confirm: AIMS Property Securities Fund is different from AIM Apac REIT right?
Willie
What about the Perpetual sercurities? They are debt also, although considerted equity on paper
Hi Joseph!
If you’re considering perpetual securities as an investment, I say they are pretty good investments too! Again, it’s down to the “pricing” of the perpetual securities. Unfortunately, these securities are $250k a pop!
Willie
No. I meant that AIMs has quite a bit of perpetuals on their books. Hence their gearing is higher than it seems to be.
Yes, if you include perpetuals, the gearing is higher. But I wouldn’t include perpetuals as part of the debt calculation simply because perpetual holders cannot call a default on the REIT. And the REIT can also choose to skip perpetual coupons (but accumulate it instead) and not suffer a default. This is a favourable to the REIT.
Willie