Brokers' take: RHB raises AIMS APAC Reit target price to S$1.70 on strong logistics assets demand

AS demand for logistics space continues to remain positive despite the pandemic, RHB analyst Vijay Natarajan sees further upside for AIMS APAC Reit O5RU (AAReit) on the back of its high occupancy rates.

In a report on Friday, the analyst noted that the Reit's portfolio occupancy rate has risen to 95.4 per cent in FY2021, which places it in a better position to negotiate rental rates for lease renewals. Some 24 per cent of its leases are due for renewal in the next financial year, and he expects a 2 to 5 per cent rise in rental reversion then.

There is also further room for acquisition-led growth and redevelopment as AAReit's acquisition of 315 Alexandra Road is expected to be completed soon, pending final approvals.

The Reit's modest gearing of 38 per cent could also present possible opportunities for it to redevelop older industrial assets into higher-value projects like data centres and make more earnings-accretive acquisitions in Singapore and Australia.

Furthermore, the FTSE EPRA Nareit Index Developed Asia series' investable market cap threshold was reduced in its latest ground rules update, which could allow AAReit to join the index with its current market capitalisation of US$486 million.

The FTSE EPRA Nareit Developed Asia Index is a subset of the FTSE EPRA Nareit Developed Index and tracks the performance of listed real estate companies and Reits. The next review of the index will take place in September and should boost AAReit's visibility and liquidity if it is included.

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The Reit also remains one of a small minority of Singapore Reits (S-Reits) that paid management fees fully in cash last year. As its unit price recovers above book value, Mr Natarajan noted that AAReit's management is open to paying partial fees in units.

Assuming that 20 per cent of management fees will be paid in units and by tweaking interest costs, the analyst predicts that distribution per unit could increase by 2 to 3 per cent between FY2022 and FY2023.

In maintaining "buy" on the Reit with a raised target price of S$1.70 from S$1.58 previously, Mr Natarajan said that its current valuation of 1.1 times its price-to-book ratio remains attractive when compared to other industrial S-Reits' average of 1.5 times.

AAReit's unit price has already outperformed the market since the start of the year, rising 22 per cent against an average of 3 per cent for S-Reits. AAReit units ended at S$1.57, after having risen 2.61 per cent on Friday.