O5RU – AIMS AMP CAP INDUSTRIAL REIT

Background

I bought 5,100 units of the REIT on 23 May 2018 as part of my dividend income portfolio construction. I guess after attending the AIMS AMP AGM 2018 which was held yesterday, I should pen down my thoughts on this REIT to remind myself of the decision I made.

AIMS AMP CAP INDUSTRIAL REIT is an industrial REIT that has 25 properties in Singapore and 1 property in Australia. About 60% of its Gross Rental Income (GRI) is derived from warehouse sector. In terms of geographical diversification, about 85% of GRI is from Singapore along and the remaining 15% from Australia.

The Pros

1) Prudent capital management

During the AGM yesterday, I sense overall dissatisfaction from the unitholders. For instance, there is one unitholder criticizing top management team being “overly conservative” in terms of purchasing additional properties to further grow the DPUs for its unitholders. Also, another unit holder questioned the validity of continuously maintaining good credit rating when the REIT has sufficient room to fund more debt to purchase additional property to grow more DPUs.

The management team, however, has long term view. For instance, they were waiting patiently for the Australia property market to go bearish so that they can purchase high quality assets at cheaper price. Also, they saw a need to maintain good credit rating so that when the market is bad and when there is a need, they can refinance their debt with less restrictions.

2) Growth Driver

According to “Building Wealth Through REITs” by Bobby Jayaraman, there are three ways for a REIT to grow organically: asset enhancement initiative, capital recycling and rental increment.

Currently, there is asset enhancement initiative (AEI) being performed on redeveloping its property located at 3 Tuas Avenue 2. The redevelopment is in line with the Singapore government’s masterplan to develop and upgrade the Tuas region into a high-performing industrial space anchored by the development of the new Tuas Mega Port. When completed, the Tuas Mega Port will be able to handle up to 65 million standard containers annually, almost double the current capacity. It will be due for completion in the second half of 2019.

Also, for the capital recycling, the REIT has completely divested one of its properties located at Soon Lee Road on 29 March 2018 for SGD 8.17 million. The net proceeds of approximately S$8.0 million was used to repay existing debt to reduce aggregate leverage and create additional debt headroom for future acquisitions, asset enhancement initiatives or development opportunities.

3) Unencumbered Assets

As of 31 March 2018, the REIT has 10 unencumbered Singapore properties out of 25 Singapore assets with a total value of S$406.7 million or 33.1 per cent of the Singapore portfolio of S$1,228.7 million. The REIT can use these assets to persuade the banks to lend money when there is an urgent need.

The Cons

1) Tenant Market (oversupply situation)

Based on FY 2018 Annual Report, there is a consistent decrease from year 2016 to year 2018 in Gross Revenue (by 6%), Net Property Income (by 7%) & DPU (by 9%). This is probably due to prolonged weak industrial market, coupled with the recent Trade War and rising interest rate enviromnent. Under this situation, it is very tough for the REIT to negotiate for higher rental and thus its tenants have higher bargaining power on the rental.

Quite a munber of unitholders attended the AGM is overly concerned about the future prospects of the REIT. Personally, I do believe this situation will last for a few years but I intend to hold this REIT for long term as my primary objective is to get dividend income, not capital gains. I just have to be patient for the market to take time for self-recovery.

Reasons why I buy

a) Gearing Ratio (take into account Perpetual Securities if any) < 40%. Based on FY 2018, my calculated gearing ratio is 33%.

b) Dividend Yield (DY) > 6%. Based on unit price of SGD 1.37 with the DPU of SGD 0.1105, the DY calculated was 8.06%. Also, the DY of the past five year is about 6.8 – 8.8%. This means buying the units at 8.06% DY is reasonably cheap.

Violation on either one of these will trigger me to sell all my existing units.


***Latest update***
I sold the entire position because I decided that blindly chasing dividend yield alone is not the right approach in dividend investing. In this case, the AA REIT is operating in challenging environment as the industrial property market is cyclical in nature, hence the high yield.

Besides that, I am not a fan of dividend reinvestment plan (DRIP) and I do not like companies that frequently raise funds from capital markets. In the case of DRIP, if I choose not to subscribe it, over the long run my ownership on this position will be diluted. As for the latter, AA Reit issue private placements quite frequently to raise funds from institutions. Retail investors have no choice but to stand and watch. In either case, current ownership is diluted.