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This blog started as a reply to a reader's comment and it became quite long.
So, I decided to publish it as a blog because I think many readers are probably interested in hearing me talk to myself on AIMS APAC REIT's performance.
AIMS APAC REIT (AA REIT) is retaining some income instead of distributing 100% of their distributable income.
We are living in extraordinary times and this is an extraordinary move.
I remember when I was given a tour of some of their properties in the western part of Singapore, they told me that they preferred to distribute all their distributable income to investors because they would have to pay a tax on whatever income they retained.
If you are new to my blog or if you cannot remember, see:
A private tour of AA REIT's properties.
In that blog, I shared 5 questions which I asked and the answers I received from the CEO then.
Question number 4 was on if AA REIT thought of retaining some income.
Anyway, although it is an extraordinary move, I am glad they made it because things could get worse before they get better.
As for AA REIT's lowering DPU starting from FY2016, things have been pretty challenging for local industrial properties landlords in recent years.
That prompted me to blog about the situation in 2017:
AA REIT challenged?
At the time, AA REIT was trading at a premium to NAV.
Many REITs have Master Leases and these usually give an illusion of higher occupancy and also higher income.
I am not being critical here but just saying that this happens in the natural course of business for REITs.
When Master Leases expire and if they are not renewed, usually we see income for the REIT takes a hit.
This has happened to AA REIT in the past and it has happened again to AA REIT recently.
The important thing is whether we have an honest and competent manager in place to mitigate the effects and I think AA REIT has such a management.
The oversupply of industrial properties in Singapore which was partly a result of overbuilding meant negative rental reversions over the years and it has impacted DPU.
Unfortunately, being a smaller REIT, AA REIT does not have the financial muscle nor flexibility to acquire yield accretive assets as rapidly and, of course, it is also more difficult for them to do so when they offer a relatively high distribution yield.
This is why AA REIT's strategy has been predominantly the redevelopment of their assets on hand as many assets have not maxed out their plot ratios.
Of course, when assets are being redeveloped (i.e. torn down and rebuilt), they don't generate any income.
We should expect this to continue as the REIT has many more assets in Singapore which have not fully utilised their plot ratios.
AA REIT's portfolio occupancy has declined from 91% in 2017 to 89.4% now.
Their overall revenue has also reduced from $120.11 million in 2017 to $118.86 million now.
However, it is interesting to note that their NPI or net property income has gone up from $79.4 million in 2017 to $89 million now.
This is achieved on the back of gearing ratio declining from 36.4% to 34.8% too.
All in all, for an industrial properties S-REIT of this size, I feel that AA REIT has done pretty well.
To reiterate, the lower quarterly DPU of 2 cents announced today is due to the management being prudent in not distributing 100% of the REIT's distributable income due to economic uncertainties created by the COVID-19 crisis.
Having said this, like I said before, if the crisis were to drag on for many more months, it would be unrealistic to think that AA REIT's income would not be negatively impacted.
I increased my investment in AA REIT last week because I felt that things were more settled and not because I thought that the bull would come charging back soon.
I try to remind myself that bona fide investments with the ability to generate a relatively attractive and reliable income should form the bulk of my investment portfolio.
Of course, there are many investments for income available out there and we invest in what make sense for us.
AA REIT makes sense for me.
Related post:
AA REIT investment is larger now.
Reference:
AA REIT FY2020 presentation.
Bloggy Award
19 comments:
Hi AK
I just cant believed the force behind this blog. Your friend must have forgiven you already.
Lol
Hi SgFire,
I don't think that Mr. Market cares about what I think or what I say.
Really, I do believe that I am innocent. -.-"
I think that if one is willing to do some comparative analysis, it should be obvious that, even now, AA REIT is a relatively attractive investment for income in the industrial properties S-REITs space.
The DPU of 2c represents a payout of only 80% or so of AA REIT's operational cashflow and if we annualise this, even at a price of $1.20 a unit, AA REIT is offering a distribution yield of about 6.67% which is higher than what some S-REITs in the same sector are offering and they pay out 100% of their operational cashflow.
Hi Ak
I always enjoy reading your full analysis of a stock.
Do you foresee AA reit might return the portion that they kept to shareholder before end of next FY?
The reit might not receive tax deduction if they payout only 80% for next fy albeit MAS new ruling.
Hi SgFire,
Yes, the government extended the timeline from 3 months to 12 months for S-REITs to distribute at least 90% of taxable income (after the end of financial year 2020) to qualify for tax transparency.
However, AA REIT has only retained 20% of income in Q4 and not the FY.
For FY2020, this retained income is probably closer to 5% of total income available for distribution.
Having said this, AA REIT has always distributed 100% of income from operations in the past.
So, I feel that if this retained income is not offset by some cost incurred in the next the next 12 months, AA REIT should be distributing it to unitholders sometime in the same time frame.
Thank you for your reply AK
I had joined you at 92 c .
Hi SgFire,
Sounds like you bought some at the bottom in March.
The last time I bought at that kind of price was more than 10 years ago.
I certainly hope that the investment will be as rewarding for you as it has been for me. :)
Hi Ak,
Wah, very kamxia for writing a post to my query.
Keep talking to yourself more.
RN
Hi RayNg,
I anyhow talk to myself but you don't anyhow listen, OK? ;p
Hi AK
I don't know if its a good thing to know that i buy aims at your cost. The market is really scary and merciless in march. Many people loss money big time for a market to drop in that speed.
When you purchased aims 10 years ago how was it like ?
Was it trading below nav like right now ? negative rental reversion ?
my faith of holding the shares would be similar to yours 10 years ago. I believed this is bear cycle which will turn up upon recovery.
Hi SgFire,
I was replying to your questions but started rambling.
So, decided to blog about it instead:
HERE.
Dear Ak
Aims has shot up to 1.23 late afternoon with a volume of 3million. And I am sitting on a double digit percentage gain and collecting 8% along the way.
I hope it will continue to ascend to NAV price of 1.35 to do justice to it's share price.
Hi SgFire,
There is always hope, of course.
Apparently, AA REIT has been included in the MSCI Singapore Small Cap Index.
Good news. :)
Ak
Have you ever invested in Crownwell? Thought it's property is located in EU where negative interest is introduced.
Thanks 😊
Hi Sunny,
I prefer IREIT Global. ;)
I explained to another reader:
HERE.
Hi AK,
Have you ever consider MapleeTree north asia (MNACT)?
Hope you dont mind to talk to yourself on this.
Thanks!
Hi AK,
Have you ever consider MapleeTree north asia (MNACT)?
Hope you dont mind to talk to yourself on this.
Thanks!
Hi Elix,
I think MNACT was MAGIC once upon a time.
I remember looking at it back then but decided I didn't like it.
Can't remember the details now.
Today, I am not interested in it because of its weak interest cover ratio.
I also wonder about the unrest in Hong Kong and Festival Walk which accounts for more than half of the REIT's income?
When in doubt, I should stay out.
Hi Ak, Thanks for talking to yourself and the reminder of "When in doubt, I should stay out".
Hi Elix,
Of course, I don't know everything.
Having said this, I have enough on my plate to keep me occupied. ;)
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