Brokers' take: DBS and RHB lower AA Reit TP on acquisition delays and financing costs

ANALYSTS have lowered their target price (TP) for Aims Apac Reit (AA Reit) after factoring in acquisition delays and financing costs.

RHB’s analyst said in a report issued Thursday (Apr 28) that it has revised its TP to S$1.66 from S$1.72, due to the delay of the Reit’s acquisition of 315 Alexandra Road, as well as a tweaking of interest cost assumptions. 

DBS Group Research lowered its TP to S$1.55, down from S$1.60 based on a higher risk-free rate assumption in its projections of the Reit’s financing costs.

Units of AA Reit were trading S$0.01 or 0.7 per cent higher at S$1.43 as at lunchtime on Thursday.

“Although AA Reit reported a marginal improvement in financing costs and an increase in the hedging of its interest rates to fixed rates (92 per cent of debt), we prefer to remain conservative,” said DBS analysts.

Both RHB and DBS have maintained their “buy” call on the Reit, noting its strong positive rent reversion of 14.7 per cent year on year in Q4 2022.

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“With 14.4 per cent of the lease expiries in FY23 well spread out across its portfolio, we believe there is potential for further positive rental reversions in the year,” said DBS’s team. 

It added that annual rental escalations of between 2.75 and 3.25 per cent for leases in Australia will support organic growth. 

Coupled with the full-year contribution from the Woolworths headquarters in Australia and the assumed acquisition of 315 Alexandra Road by Q2 2023, DBS projected an approximate 1 per cent growth in distribution per unit (DPU) year on year.

On Wednesday, the Reit posted a 4.8 per cent fall in its DPU to S$0.0471 for its second half ended Mar 31, from S$0.0495 a year ago, as distributions to unitholders declined 3.8 per cent on year to S$33.6 million for the period, from S$35 million.

The Reit said distributions fell largely due to the distributions related to the S$250 million perpetual securities issued in September 2021 for the acquisition of retail company Woolworths’ headquarters.

DBS also noted that AA Reit’s lease structures allow utility costs to be largely passed on to tenants, resulting in limited impact of recent spikes in electricity costs on the Reit.