Brokers' take: Analysts raise AA Reit target price; conversion of assets to data centres a positive surprise

IN the case where O5RU : O5RU 0% (AA Reit) converts several assets into data centres once the moratorium is lifted, the real estate investment trust's value will be enhanced and well supported by unitholders, DBS Group Research said in a Thursday report.

With more than 500,000 square feet of untapped gross floor area, DBS sees AA Reit as a "goldmine" of valuable land bank to extract value, and remains excited that the manager is constantly reviewing options to best utilise assets.

Both RHB and DBS maintained their "buy" calls on AA Reit, with DBS raising its target price to S$1.60, while RHB raised its target price to S$1.58 from S$1.55 previously, according to Thursday reports.

This comes after AA Reit posted a robust set of results for Q4 FY21 ended March this year.

The strong results were due to recent acquisitions, better than expected rental performance and lower rental reliefs, said DBS.

DBS and RHB also noted that there was room for rental growth with a rebound in portfolio occupancy, and positive rental reversions driven by logistics leases. The two brokers expect robust growth, given that about 14 per cent of the 24 per cent of leases expiring in FY2022 will come from logistics or warehouse properties.

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The remaining 6 per cent are from high-tech industrial properties and 4 per cent from light or general industrial where reversionary trends are expected to remain largely positive, with high tenant retention, DBS added.

Although there was a slight dip in portfolio valuations amid the pandemic, DBS highlights that the impact on net asset value remains marginal. The research house also notes that leverage is within optimal range post-acquisition, and that there would be fundraising possibilities if acquisition momentum picks up.

DBS expects strong earnings momentum in FY2022, and raises estimates by 4-6 per cent on the back of recovery in earnings and contribution from recent acquisitions, accounting for "better-than-expected rental growth and occupancies" and "lower-than-projected interest costs".

"We remain optimistic that AA Reit can deliver close to pre-pandemic earnings and project a strong 11 per cent rebound in distribution per unit (DPU) in FY2022," DBS added.

Further, the research house said that AA Reit's yield had the potential to compress by a further 80 basis points as it is currently trading at a higher forward yield of 7.2 per cent which is significantly higher than Singapore-listed industrial Reits' average of 4.9 per cent.

Meanwhile, RHB noted that valuations of AA Reit are attractive with the Reit trading at one time its price-to-book value as compared to industrial Reits' average of 1.5 times their price-to-book value, and slightly below its five-year mean.

With higher portfolio occupancy, earnings accretion from acquisitions, absence of rental rebates and lower interest expense, RHB analyst Vijay Natarajan estimates the DPU for FY2022 to grow by 10 per cent.

Mr Natarajan also expects the Reit to continue its acquisition trajectory, with potential acquisitions of S$100-200 million in assets per annum. In addition, AA Reit's modest gearing presents headroom for asset enhancement initiatives and acquisition, he said.

RHB has tweaked up its FY22-23 DPU by 1-2 per cent factoring in slightly better rental growth.

AA Reit’s units closed at S$1.41 on Thursday, up by S$0.02 or 1.44 per cent.