I identified a few key risk in investing in AIMS REIT. I hope the Management can tackle proactively this year.
1) Asset valuation is still decreasing despite the slow recovery in the local economy. I guess asset valuation in industrial properties could be lagging behind the general economy since manufacturers will only recover substantially once spending power has returned back to pre-crisis levels. High unemployment levels isn't helping it at the moment. When manufacturers recover, the demand for logistic and manufacturing hubs will increase hence driving up asset valuation.
Changes in Asset Fair Valuation
1H 09: + S$1.0 million
2H 09: - S$22.7 million
1H 10: - S$37.1 million
2H 10: - S$0.74 million
This clearly shows that over S$60 million was wiped out in AIMS (or MI-REIT) balance sheet over the past 18 months. It is good that this decline is easing and might even start to trend up in 1H 11 onwards.
Why is this crucial ? Changes in asset fair valuation is reflected in the income statement and in the balance sheet thereby affecting its investment property and equity value. AIMS debts specifically states that its gearing (debt/asset) must not exceed 38% and if it exceeds 35%, there will be an increase in interest rates by 1%. Another substantial decline in asset valuation may cause its gearing levels to rise without another penny being borrowed. The reverse is also true - an increase in asset fair valuation may decrease its gearing and hence giving it more leeway to draw-down more debt in the its refinanced loan facility (assuming they can secure it).
2) Occupancy level remains high but there was a sharp drop in 4Q.
2Q 10: 98.2%
3Q 10: 99.2%
4Q 10: 96.0% (acquisition of 5 Properties)
3) The Management intends to grow the Trust aggressively with the aim of it attaining S$1.4 billion worth of assets by 2015. This is quite impossible to achieve with a 35% gearing limit. Moreover the Trust does not retain its income for acquisition purposes in the future. Hence this implies that equity financing might be utilized in a few years time.
4) The Trust doesn't have a diversified source of funding and bankers. Currently it only uses secured bank loans from a select few banks. It has yet to take on convertible securities, unsecured loans, bonds and preference shares. While I do not like a highly geared trust, it isn't very healthy to have all your debts in one kind of instrument through a few select key banks. I believe AIMS intend to cement relationships with new bankers to get loans at a far more competitive rate (eg interest and maturity). Hopefully AIMS can help boost the Trust to investment-grade credit rating.
AIMS REIT FY Presentation Slides:
Broaden and diversify the Trust’s funding sources beyond the existing key relationships.
Target an investment grade rating of Baa3 or above (current rating Ba2) from Moody’s by maintaining strict financial discipline and investment grade metrics over the cycle.
Looking forward to their asset divestment and loan refinancing movements this year.