AA Reit is one to watch on potential corporate action, say analysts

SEPTEMBER has been a busy month for Aims Apac Reit O5RU .

The Singapore-listed real estate investment trust (S-Reit), which owns and invests in a diversified portfolio of industrial real estate assets in Singapore and Australia, was one of the 11 S-Reits to be inducted into the FTSE EPRA Nareit Global Real Estate Index series this month.

On Sept 2, a day after the announcement, the counter rose 3.9 per cent or S$0.06 to a 52-week high of S$1.60. Traded value for the day surged to S$5.7 million, more than four times that of its 12-month total average daily traded value (ADTV).

Since then, however, several announcements have wobbled investor confidence. The counter has shed 10.6 per cent of its value in just three weeks, to close at S$1.43 on Thursday.

On Sept 8, Australian media reported that AA Reit's sponsor is eyeing the national headquarters of Australian supermarket and grocery chain Woolworths. One media outlet described the sale transaction as "on the verge of being sealed".

The rumoured price tag was over A$450 million (S$441 million) - considerably higher than the A$336.5 million that South Korea's Inmark Asset Management paid in 2016.

Responding to those reports, AA Reit's manager on Sept 9 said it is "in exclusive due diligence" on the property, but no decision had been made and no binding agreement entered into. "There is also no certainty that AA Reit would acquire the property," the manager said.

At the same time, AA Reit has recently raised some money. A week before the news of the potential Woolworths property deal, the Reit had announced the issue of S$250 million in perpetual securities paying 5.375 per cent per annum.

The net proceeds were to be used for general working capital, capital expenditure and investments of the Reit and its subsidiaries, as well as the partial or full refinancing of existing borrowings, the Reit's manager said.

There have also been a few personnel movements in recent weeks.

Koh Wee Lih, executive director and chief executive officer of AA Reit's manager, resigned on Sept 8 "to pursue other professional interests".

Mr Koh had been responsible for the overall planning, management and operation of AA Reit for nearly eight years. His resignation takes effect Nov 28.

Two days later, on Sept 10, AA Reit announced that its head of finance and company secretary Stella Yeak Shuk Phin would be leaving to "pursue other interests".

Subject to regulatory approval, Russell Ng Keh Yang has been appointed CEO-designate and will assume the role of CEO of the manager on Nov 29. Lim Joo Lee will join the manager as its chief financial officer and company secretary on Oct 23.

Mr Koh's resignation has reignited speculation that AA Reit could be the target of an M&A deal with ESR-Reit.

ESR Cayman, the sponsor of ESR-Reit, had since last year been quietly building its holdings in AA Reit. It is currently the top unitholder in AA Reit, with a 13 per cent stake, up from just 5.24 per cent in November 2019.

ESR had also steadily increased its stakeholding in Sabana Shari'ah Compliant Real Estate Investment Trust (Sabana Reit) before the proposed merger between the two Reits was announced in July last year.

With the ESR-Sabana deal now off the table, after it was scuppered by disgruntled minority unitholders who opposed the merger on the grounds that it would be value-destructive, ESR-Reit may now turn its sights on AA Reit.

AA Reit's management held a dialogue session with analysts on Sept 14, which BT understands as meant to give assurance that the resignations are unrelated.

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Analysts have so far been optimistic on the counter. Bloomberg data shows four of the six research houses covering AA Reit have a "buy" or "outperform" call.

In a flash note on Sept 13, Macquarie Research said an acquisition of Woolworths' headquarters in Bella Vista could be about 2 per cent accretive to its distribution per unit (DPU) estimates for FY2022.

"Given management commentary that current gearing is comfortable, we think the perps could go towards funding this potential acquisition," said analysts Ong Hwee Yee and Derrick Heng. "We assume the remaining amount will be financed by debt taken out at the latest reported average interest cost of 2.8 per cent."

Macquarie has an "outperform" call on AA Reit, with a target price of S$1.70. "Successful acquisitions will provide further income growth," the research house said, adding that the Reit provides "an attractive 7 per cent yield".

RHB, meanwhile, has named AA Reit as one of its top picks among the S-Reits, on the back of the earnings resilience of industrial Reits.

"Logistics, high-tech and business parks remain our preferred sub-segments, as these should be less impacted by Covid-19 while benefiting from the government's longer-term push to transform Singapore into a smart nation," said analyst Vijay Natarajan.

RHB has a "buy" recommendation on AA Reit, with a target price of S$1.70.

"We see it as a laggard play on the logistics sector, with an attractive valuation of 1.1 times book value versus the peer average of 1.6 times book value," Mr Natarajan added.

DBS, however, is slightly less positive. Its analysts revised its DPU estimates down following the Reit's last results release. "Our (DPU) estimates are revised down by close to 5.5 per cent mainly due to the delay in the completion of the 315 Alexandra Road acquisition," said DBS analysts Dale Lai and Derak Tan.

"We believe AA Reit continues to be on the lookout for its next acquisition but given the lack of visibility and the compressed cap rate environment, the Reit needs to be highly selective," the analysts said as they downgraded their recommendation to "hold", from "buy" previously, with a target price of S$1.60.

DBS also said AA Reit's next deal "may come in the form of a business park asset in Australia, similar to the type of asset on its books".

For Q1 FY2022 ended June, AA Reit had announced DPU of 2.25 Singapore cents - up 12.5 per cent from DPU of 2 cents in the year-ago period.

Gross revenue rose 16.8 per cent to S$31.8 million for the quarter, while net property income grew 23.9 per cent on-year to S$23.1 million. The growth was mainly contributed by new leases at its recently acquired 7 Bulim Street property, and higher rental and recoveries from two of its other properties: 20 Gul Way, and 8 and 10 Pandan Crescent.

AA Reit is up 13.5 per cent this year, and is trading at 0.93 times its book value and an indicative gross dividend yield of 6.3 per cent.