I would be cautious on AA REIT

Last Friday, I bought a few lots of AIMS APAC (AA) Reit. The trigger for the purchase was more speculative than fundamental.

AA Reit share price has dropped 10%+ from its peak of $1.60. This peak price level was first reached on 2Aug and then again on 2Sep. I was holding the hope that it might bounce back to $1.60 soon.

Actually, the strength of AA Reit over the last few months has baffled me a lot. Up to beginning of this year, AA Reit has been trading at about $1.20 but the improved investors’ sentiment brought about by the recovering economy helped to create the rising tide and as a result, its share price rose steadily in the last 8 months until NOW.

See the graph from Yahoo Finance below.

Last Friday, Business Times has a report that titled “AA Reit in exclusive due diligence to acquire Woolworths HQ in Sydney”. Usually with such a report, speculative investors would use the opportunity to push up the share price but interestingly enough, the share price not only didn’t rise but fell badly instead.

This made me even more curious and thus I decided to spend some time looking at AA Reits’ fundamentals using their last 6 years annual reports as a reference.

That’s where I realised that I had “overpaid” for my AA Reit shares bought last week and would be more cautious going forward with AA Reit. And I thought it might be useful to do a bit of “self-talk” to share my learning.

The following are my learning:

#1 Current AA Reit yield of 6.4% is the lowest yield that it has for the last 6 years. A lower yield is caused by either a higher share price or a lower DPU. Compared to last year, AA Reit DPU has dropped from 9.5 cents to 8.95 cents while its share price has increased – see above. Double whammy !!!!

#2 AA Reit DPU has declined every year for the last 6 years – it was 11.35 cents in 2016, 10.30 cents in 2018, 9.5 cents in 2020 and 8.95 cents this year. This doesn’t look good for sure for any Reit.

#3 AA Reit Net Asset Value has also declined for the same period – it was $1.48 in 2016, $1.37 in 2018, $1.35 in 2020 and $1.36 this year.

#4 Getting #2 and #3 together would have set off any alarm bell.

#5 Over the years, AA Reit has always been a “high dividend yield” Reit. It may be because of its troubled history and for having mainly short leasehold assets in Singapore. Looking at historical yields, AA Reit has traded between 6.4% and 10.2%. Current 6.4% yields is the lowest. Assuming that its yield would return to mean, i.e. closer to 8%, then its share price should be trading closer to $1.15 level at current DPU level. Hmm, that’s quite a gap from current price.

#6 Its share price has also traditionally traded between 0.7x and 1.1x of its Net Asset Value. At last Friday price, it is trading close to 1.05x. Assuming that the mean is 0.9x, then share price should be closer to $1.2.

Therefore, based a few simple metrics, I feel that it is risky to invest further in AA Reit unless its share price drops further to say $1.20.

Anyway, I was clear that my purchase was more speculative than fundamentals. Hence, if I get a chance to sell them at a small profit to buy a steak dinner at ISteak, I would.

If you are planning to buy AA Reit, I would suggest to exercise more cautions at the current price level.

BIG Asset Purchase on the Horizon?

As mentioned earlier, AA Reit was reported to be in exclusive due diligence to acquire Woolworths HQ in Sydney. This will be a BIG deal for AA Reit was it was reported that the deal could be worth as much as $450 Mln. It is about 1/3 of total AA Reit current investment properties value. If AA Reit eventually bought the asset, it would increased its operational risk as a company. This is because the bulk of its earning would then be relying on a single big asset and the asset is located overseas and thus subjected to forex risk.

Equity Rights Issue Coming?

While AA Reit aggregate leverage is not very high, at ~34%, but the debt headroom is also not much as AA Reit is a small Reit afterall.

Maybe the leverage can go up to 40% which would give them additional debt of ~$150 Mil. This is unfortunately not enough to buy the Woolworths HQ valued at $450 Mln. Therefore, it looks like equity rights issue will be needed if AA Reit goes ahead to purchase it.

This is generally not a bad thing if the purchase and financing mode can enhance shareholders’ returns.

The only problem is that shareholders have to cough out more money to participate in the equity right issue to gain more shares and to avoid dilutions. If they are not able to do so, their returns would drop while others who have deep pockets can get their entitled shares and gain handsomely. Therefore, it can be quite a disadvantage if you are not cash rich.

Wait and See

Hence, for the above reasons, I think it is better to wait and see how things emerge for AA Reit before taking a major step. If it is going for the purchase and would be doing an equity rights issue, it may be better tgo wait for the dust to settle before taking up a significant stake in AA reit.

Hope you find the above “self-talk” useful.

(By the way, it is great to see Hong Kong bouncing back recently, hopefully the upward trend will continue)

Have a great investment week ahead folks

Stay safe always

Regards,

Warriortan

3 thoughts on “I would be cautious on AA REIT

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