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Simons Trading Research

Author: simonsg   |   Latest post: Tue, 18 Jun 2019, 5:01 PM

 

AIMS AMP Capital Industrial REIT - Untapped Potential

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  • AIMS AMP Capital Industrial REIT's 2Q19 DPU of 2.5 Scts (flat q-o-q) - inline.
  • Occupancy lifted from 91.5% (1Q) to 93.6% (2Q).
  • Upside potential from redevelopment opportunities (such as 3 Tuas Ave 2, which is ongoing) and unlocking of unutilised GFA.
  • Maintain BUY; Target Price of S$1.55.

Attractive and resilient yields.

  • Being predominantly focused on Singapore, we like AIMS AMP Capital Industrial REIT (AA REIT) for its diversified asset portfolio and attractive exposure to in-demand properties such as business parks and modern ramp-up facilities.
  • Supported by master leases with built-in rental escalations, AA REIT offers investors a higher degree of income certainty ahead of the sector’s anticipated recovery in 2020 with attractive dividend yields of 7.7-7.9% p.a. over FY19F-21F.

Where We Differ

  • We see AIMS AMP Capital Industrial REIT as unique for its 600,000 sqft of untapped gross floor area (GFA) - one of the highest among peers.
  • Given the prime location of selected properties, we believe that the Manager can potentially redevelop these sites into future-proof assets such as data centres and estimate that the unlocking of unutilised GFA could lift its proforma FY18 revenue and NAV by 15.8% and 7.9% respectively.

Prime acquisition candidate?

  • With consolidations among industrial REITs in focus, we believe that AIMS AMP Capital Industrial REIT (AA REIT) could be a potential target given
    1. the fragmented shareholding structure,
    2. access to untapped GFA within the portfolio.
  • Including untapped GFA, AA REIT’s implied yield (NPI/EV) of 6.4% would place it at the upper end of its peer range of 5.1- 6.6%.

Valuation

  • Maintain BUY and DCF-based Target Price of S$1.55, based on WACC of 6.6% and terminal growth rate of 1.4%. 
  • The redevelopment of AIMS AMP Capital Industrial REIT’s under-utilised sites could raise its fair value to S$1.65.

Key Risks to Our View

  • Key risks include lower rental income arising from increased competition and prolonged negative rental reversionary trends.

What's New - AA REIT’s 2Q19 DPU of 2.5 Scts in Line

2Q19 results in line

  • The sequential growth in gross combination of the first full quarter of rental contribution from 51 Marsiling 27 Penjuru Lane arising occupancies.
  • Meanwhile, NPI relatively stable at S$19.3m.
  • AIMS AMP Capital Industrial REIT’s share of results from Australia-based Optus due to timing of recoverable expenses recovered from the tenant.
  • Distribution income was flat down 1.6% compared to a year ago.
  • AIMS AMP Capital Industrial REIT also maintained a 2.5-Sct DPU for 2Q19 – unchanged decline vs 2.55 Scts in 2Q18.
  • 1H19 DPU of 5.0 Sct formed 49% of our line.
  • Typically exhibits an increasing DPU trend through quarters, we believe that there could be distributions in subsequent quarters if sustained.

Leasing updates reflect operational improvements

  • AIMS AMP Capital Industrial REIT continued to post improvements on the occupancy front – raised portfolio occupancy from 91.5% (2Q) to 93.6% (3Q), above the industrial average of 88.7%.
  • Executed 14 new and renewal leases in 2Q19, representing over 290,000 sqft (or 4.3% of portfolio NLA).
  • Rental reversions remain negative at 9.8% during the quarter, but compares well against double-digit rental reversionary levels in the previous year, reflecting an improving trend.
  • Meanwhile, the uptick in occupancy levels should continue to feature positively in AIMS AMP Capital Industrial REIT’s top-line performance in the upcoming quarters.

Stable asset values; gearing headroom available

  • NAV remained stable at S$1.37 per unit as valuations for its Singapore portfolio, which firmed up slightly, were offset by unfavourable forex effects on its Australia investments.
  • Gearing (A/L) was unchanged at 33.6%, with all-in debt cost of 3.6%. This includes AUD funding for Optus Centre.
  • This implies gearing headroom of > S$150m.

Outlook

  • As the industrial sector continues to bottom growth over the near-to-medium term will likely be driven by selective unlocking of over 500 sqft of untapped GFA.
  • Redevelopment of Tuas is ongoing and on track for completion in 2Q19.
  • Acquisition opportunities, if they materialise, could also help drive growth.
  • We also note the expiry of the Eurochem master lease experience some slack in efforts to re-commit progress as planned.

Source: DBS Research - 26 Oct 2018

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