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$1.60 target price for AA REIT. Really? Why so good?

Sunday, May 14, 2023

I make investment decisions based on my own analyses.

However, as a retail investor, I am cognizant of the fact that my analyses are usually incomplete.

I have compared the exercise to a game of jigsaw puzzle.

As long as I have the crucial pieces of the jigsaw puzzle in place, I should be able to make a decision.

I have been blogging and making videos about AIMS APAC real estate investment trust.

It has been one of my better investments for income which has also appreciated in value over the years.

Unlike some other investments which gave me worries from time to time, and a few investments even gave me near heart attacks, AIMS APAC REIT has given me peace of mind.

(Before I go on, if your eyes are feeling tired and you would rather listen to AK talking to himself, you can listen to the video which I have embedded below instead.)

When I remember that I have been invested in the real estate investment trust since the Global Financial Crisis, that is a very long track record.

AIMS APAC REIT has paid me consistently, through good times and bad times.

Still, there could be things I don't know about the real estate investment trust.

So, when I chance upon analyses done by experts, I would read them to see if I might find some missing pieces of the jigsaw puzzle.

Even opinion pieces can be interesting.

In a report dated 8 May, DBS research published a higher target price of $1.60 per unit for AIMS APAC REIT.

The target price is quite a bit higher than what AIMS APAC REIT is trading at.

Apparently, the researcher at DBS was surprised that the real estate investment trust delivered a better performance than what they were forecasting.

The very strong positive rental reversions of 18.5% and record high portfolio occupancy of 98% were the reasons given for why the real estate investment trust outperformed the researcher's expectations by as much as 15%.

It doesn't stop there.

DBS research house thinks there could be more upside because of two reasons.

1. Weighted average lease expiry or WALE of 1.4 years for the logistics and warehouse segment is the shortest in AIMS APAC REIT's portfolio.

Usually, we want a longer WALE for stability.

However, as the passing rent of $1.22 per square foot for this segment is below the current market rate of $1.40 to $1.80 per square foot, the shorter WALE is a positive for AIMS APAC REIT.

We can expect the strong rental reversions for logistics facilities to continue.

2. AIMS APAC REIT plans on growing organically through more Asset Enhancement Initiatives and redevelopment opportunities.

I have been blogging about the potential for AIMS APAC REIT to maximize land use of many assets in their portfolio which have underutilized plot ratios.

So, this is not something I didn't already know.

Anyway, the higher target price by DBS took into account not only past performance but also expected future performance.

As for the possible downside, AIMS APAC REIT has a high proportion of loans or around 88% hedged to fixed rate.

They also do not have any refinancing requirement until November 2024 when a $100 million MTN will be due.

Will AIMS APAC REIT trade at $1.60 a unit in the future?

It is definitely possible as it has done so in the past and it could do so again.

However, that's not how I would approach the real estate investment trust as a possible investment.

Why not?

I am mostly an investor for income and I care more about whether I will be receiving regular meaningful income from an investment.

If the market price of that investment should go up, it is a bonus.

If it doesn't go up, as long as it keeps generating income from me and doesn't make me worry, I am happy enough to stay invested.

If AK can do it, so can you!



Jon said...

If you have $5k of spare cash to invest, would you put all of it into OCBC, AA REIT or AA IREIT or others? And why? Thanks

Jon said...

If I have $5k of spare cash to invest, would you invest all in OCBC, AA REIT or IREIT or others? And why? Thanks AK

AK71 said...

Hi Jon,

Alamak. I think you are a regular reader of my blogs.

So, you should know that is a question I would never give a straight answer to.

Not allowed to give financial or investment advice.

bu yao hai wo. (TmT)

You can read my blogs on the businesses and probably get a feel for my preferences.

My circumstances are likely to be different from yours and what I do with a spare $5K might not be the way for you to follow with your spare $5K. ;)

S A said...

Hi AK, what is the fair price for entering into AA REIT?

AK71 said...

Hi S A,

This is such a coincidence. :D

I just produced a video on how people are always asking me questions like "is this a good entry price" or "what is a fair price?"

DBS fair value is $35? Intrinsic value?

I blur lah. ;p

bu yao hai wo. -.-"

blazingruby60 said...

hello AK
AIMs has dropped to 1.18 lower than 1.189 for rights are you picking up some AIMS in the market?:)

AK71 said...

Hi Ruby,

Please see my latest blog published earlier tonight for the update. ;)


And maybe this blog too:

AA REIT and IREIT Global: My plan.

Jojo said...

What's your thought on AIMS APAC's perpetual securities. They currently have ~$375M in perps. They have classified this as equity which is all per the regulations. There are differing views out there that suggests this should have been classified as debts. And if you do so, their leverage ratio would have been much higher. Views on this are divided on how it should be classified. My view is as long as AIMS can earn enough to for the perpetual securities payout, especially in this high interest environment, there shouldn't be anything to be concerned off. And of course, their DPU has been increasing despite the high 5% payout for perps. What are your thoughts?


AK71 said...

Hi Jojo,

Someone in my YouTube channel asked a similar question. I copy and paste for you. ;p

4 days ago
@A.Singaporean.Stocks.Investor. AIMS APAC if include perpetual, gearing seems close to 50%. Do you see any danger in it?

4 days ago
@ivanseow9523 Perpetual bonds are fixed income securities with no maturity. Used judiciously, it will help manage debt and improve returns.

If we are worried about this, then, we would have to worry about many popular REITs in Singapore now such as Lendlease Global Commercial REIT.

Still, you are right that we should keep this in mind because becoming too reliant on perps is not a good thing because in a situation where income drops, perps will still get paid the full coupon while common shareholders take a big cut.

Link to video:
Stock market crashing soon?

HH said...

Hello AK, AIMS will have perpetual securities with call dates in Sept 25 and Aug 26. The coupon rate is 5.65% and 5.365% respectively.

If in the event AIMS does not redeem the securities, will the coupon rate go up or down? Not sure if it will be tied to the prevailing interest rate at the call date.

If AIMS decides to redeem the securities, most likely they will have to get some debt/equity financing for it which may bring up the gearing. Let's hope they don't do rights issue for this. :P

Is this a concern to you? Their ICR including the securities is only 2.3 times which is low to me. Will need your help to talk to yourself. Thanks a lot.

AK71 said...

Hi HH,

This is a reason why I have been cautious about not adding to my investment in AA REIT.

I have been invested in AA REIT since the GFC and at a very low price too.

So, my existing position is free of cost and as long as the REIT still pays me, I am happy enough.

How will things pan out? I cannot say for sure.

It is just wait and see for me now.

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