AIMS APAC REIT — let’s start off with financial numbers.
Last year, AAREIT’s revenues was up 17%…
It grew its rent by 37%…
And distribution per unit (DPU) rose 5%…
The best part?
AAREIT’s shares now trade at a pretty high 8% dividend yield…
And one of the Singapore REIT’s I’ve spoke about before.
Yet, despite these bullish numbers, shares fell over 21% over the past five years.
Last week, shares dipped again because AAREIT decided to issue sell shares – or raise equity.
What happened?
And why is the stock selling cheap?
Well, Mr. Market never liked REITs that raised too much shares – this meant unitholders need to put in more money, which is never a good thing.
The thing is, REITs don’t keep much cash because they pay most of their profits as dividends.
Which means, they often need to borrow debt or sell more shares (equity) to grow their assets.
But a closer look showed AAREIT’s recent new shares raising is small — for every 1,000 shares you own, you get to buy another 35 units in this preferential offering.
That’s reasonable.
AAREIT’s total assets stood at S$2.3 billion. I wouldn’t consider raising S$100 million of new shares “dilutive” to unitholders.
What’s more, management said it’s going to use these new money to renovate and redevelop its existing properties.
In other words, AAREIT is not buying new properties in this current high rate environment.
Instead, AAREIT wants to maximize its rental income by increasing properties’ floor space, and extend tenant leases.
I could potentially see a much higher DPU in the future.
In fact, after redevelopment, some of these properties’ yield could go up to 8.4-9%.
Even with AAREIT’s current high interest costs, I find this equity raising a piece of good news.
AAREIT’s cautious management drives its steady dividend
The thing is, AAREIT is a conservative landlord.
AAREIT has maintained just under 30 properties since it was restructured in 2009.
Yet its market value grew from S$530 million to S$2.2 billion over the last 14 years.
As a property investor, I find this a remarkable sign of a high-quality manager.
I mean, when AIMS Financial Group took over AIMS APAC REIT (previously called the MacarthurCook Industrial REIT) in 2009, it turned around the business, and sweated each property like a workhorse.
Management stuck to what it knows best – old-school industrial properties.
The good news is… even after this recent equity raising, AAREIT still has potential to grow — there’s still around 500,000 sqft of untapped potential and another 1.5 million sqft untapped in Australia.
Not too bad for a S$900 million Singapore industrial REIT.
But here’s what I found more interesting…
The thing is, there’s going to be a bigger demand for industrial properties here because of the growing presence of third-party logistics players…
Plus there’s going to be lower supply of modern logistics properties, which could possibly mean a much higher rental growth, which I’ve also said before.
According to management, AAREIT’s 21% of its leases are up for renewal next year. Of which, 90% are from logistics and warehouse that could see a strong rental adjustment upward.
This puts an old economy landlord like AAREIT, in rising tide of a new economy tailwind.
Yet, AAREIT shares aren’t exactly capturing this potential rental growth.
Then… should I worry about high interest rates?
AAREIT pays higher interest costs than other Singapore REITs – last year, it paid S$27 million of interest on S$790 million of debt, which is 3.4% interest cost.
The good news is, however, it doesn’t need to borrow any more money from the bank until at least 2025.
And it has hedged 88% of its interest rate as fixed payment.
This means, for every 0.25% increase interest rates, it’s only going to lower its by 0.08 cents.
With a low gearing, I don’t think AAREIT should get into any sort of big danger with higher interest rates.
My final thoughts — is AIMS APAC REIT a Buy?
Whenever I check a REIT’s assets, I ask myself the same question when I watch movies – is it based on a true story or fictional?
You see, AAREIT doesn’t own crown jewel assets like Vivocity, Serangoon Nex, or any grade-A offices.
It doesn’t own the best-in-class data centres like the Mapletree family.
And it certainly doesn’t have a government-backed sponsor with massive asset size.
What it lacks, however, AAREIT makes up for its “bang-for-your-buck” properties – old-fashioned assets such as warehouses, logistics and business parks that are close to full occupancy and potential room for higher rental growth.
What’s more, at 8% dividend yield, it seems like the market has overreacted to its recent new shares offering.
Perhaps this is one industrial Singapore REIT worth looking at.
And also a Singapore REIT I prefer to versus this.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Hi Willie,
Hope you are keeping well.
I tried emailing you at the email address stated in your privacy policy (help@dividendtitan.com) but it bounced so decided to leave my question here. Sorry I am not comfortable leaving my email address but please feel free to respond here and I will look out for your feedback.
Thank you for your articles contributing towards everyone having their money working safely and profitably through dividends. Dividends investing is indeed a long forgotten part of the investing community – I’m sure you are aware that Charlie Munger is a fan of dividend paying companies as it keeps management disciplined.
I came across your well-written article on AIMS APAC REIT (https://www.dividendtitan.com/is-aims-apac-reit-at-8-dividend-yield-a-buy).
I would be keen to hear your thoughts as I am young in my investing journey and always keen to learn from seasoned investors like you.
In your article, you stated that the rights issue was not dilutive by comparing the $100m raise versus $2.3bn of assets.
Traditionally, I have stayed clear of REITS as I worry about the structure of dividend clawback every few years via equity issues. In addition, most of these issues have private placements that do not benefit all shareholders equally.
My way of looking at this is that I compare against the net asset value or market cap, as I believe these belong to shareholders (e.g. if liquidated). Based on the net assets and market cap of $993m, I consider a $100m equity issue as a 10% dilution (so about 1.5 years of dividends as the last issue was in 2017). Hence, if rights issue / placement occurs every 5 years, it dilutes the effective dividend yield by 30% (= 1.5 / 5) which suggests a sustainable distributable dividend yield of around 5.6%.
Also, I consider the $334m of perpetual securities as “debt” even though it is accounted for as equity. Allowing for the higher cost perpetual securities, AIMS-APAC tota debt increases from $790m to $1,124m, or 45%, which is higher than REIT-limits. Perpetual securities “interest” is around 5.5% which means that AIMS-APAC’s weighted debt cost is significantly higher than 3.4% that they reported.
Thank you in advance for your time – I look forward to hearing from you.
Thanks,
A
How do you view AA REIT’s perpetual securities? They have classified it as equity. Some viewed it as debts which if added drastically increased their leverage ratio.