• AIMS APAC REIT's 4Q19 DPU of 2.75 Scts (+10% q-o-q) in line.
• Recent concerns over CWT leases to ease as focus shifts toward underlying tenancies, which are still healthy.
• Performance to remain stable, with ongoing AEIs set to contribute positively over the medium term.
• Maintain BUY; Target Price of S$1.50 unchanged.

Attractive and Resilient Yields

• Being predominantly focused on Singapore, we like AIMS APAC REIT (SGX:O5RU) 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, AIMS APAC REIT offers investors a higher degree of income certainty ahead of the sector’s anticipated recovery in 2020 with attractive dividend yields of 7.3% p.a. over FY20F-21F.

Where We Differ

• We see AIMS APAC 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 pro forma FY19 revenue and NAV by 14.7% and 10.3% respectively.

Prime Acquisition Candidate?

• With consolidations among industrial real estate investment trusts (REITs) in focus, we believe that AIMS APAC REIT could be a potential target given:
  1. the fragmented shareholding structure,
  2. access to untapped GFA within the portfolio.
• Including untapped GFA, AIMS APAC 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; DCF-based Target Price of S$1.50, which assumes terminal growth rate of 1.4%. The redevelopment of AIMS APAC REIT’s underutilised sites could raise its fair value to S$1.58.

Key Risks to Our View

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

What's New - AIMS APAC REIT's 4Q19 DPU of 2.75 Scts in Line

4Q19 results in line

• Revenue increased marginally to S$29.9m (+ S$0.1m q-o-q) vs 3Q19 mainly due to higher rental contribution and occupancy rates at 20 Gul Way offset by lower rental and recoveries at 27 Penjuru Lane. NPI also increased by S$0.9m q-o-q to S$20.3m in 4Q.
• Meanwhile, share of results from its joint venture in Australia jumped significantly to S$13.4m, mainly due to revaluation gains.
• AIMS APAC REIT's 4Q19 DPU came in at 2.75 Scts, which represents 10% growth q-o-q (or +4.6% y-o-y).
• Overall, FY19 DPU of 10.25 Scts formed 99.6% of our full-year forecasts, which was in line.

Robust financial metrics

• Gearing relatively stable at 33.7% (4Q19) vs 33.5% (3Q19).
• While weighted average debt maturity has declined sequentially from 2.7 to 2.4 years, we note that the REIT has undrawn committed facilities for fixed-rate notes that will be maturing in FY20F.
• On a pro-forma basis, this implies weighted average debt maturity of 2.8 years post repayment.
• Blended funding cost for the quarter stood at 3.6%.

(-/+) Concerns over CWT but leasing activity remains healthy; ongoing AEIs on track for completion by end-2019

• AIMS APAC REIT continued to push through with improvements on the occupancy front, which inched up slightly to 94% (4Q) from 93.9% (3Q), above the industrial average of 89.3%. During the quarter, the Manager executed > 11 new and renewal leases, totalling 22,000 sqm.
• Rental reversions, while still negative, moderated to -5.8% - a sign that the recovery in the industrial space is still in force.
• Ongoing works at NorthTech and 3 Tuas Ave 2 are also progressing well and on track for completion by end- 2019. To date, approximately 50% of AEI/redevelopment works at NorthTech and 3 Tuas Ave 2 have been completed.
• Negotiations with prospective tenants for 3 Tuas Ave 2 have also been encouraging. A newer façade and upgraded amenities bode well for future rents when the next tranche of leases comes up for renewal in FY20F.
• With CWT back in the spotlight recently, we note that the major tenant represented 8.8% of GRI in 4Q19, but should fall progressively over time. Actual exposures to CWT on a look-through basis are also likely to be much lower than the headline numbers suggest. We understand that leases are due to expire in phases, starting from August 2019 (FY20F), with the final CWT lease agreement expiring in July 2022. Of which, approximately 5.2% of AIMS APAC REIT’s 4Q19 GRI from CWT is set to expire in FY20F.
• Meanwhile, 3-6 months’ worth of security deposits for CWT leases offer downside protection.

Outlook

• Efforts to re-commit CWT spaces to prospective tenants or through direct leasing with underlying tenants have been ongoing. As such, we anticipate slightly softer rents from some of the CWT-occupied spaces, but should be partly mitigated by higher occupancies under a multi-tenanted approach – which was a driver of the higher GRI this quarter.
• While the industrial sector continues to bottom out over the next 12-18 months, we believe that the unlocking of value at 3 Tuas Ave 2 should continue to support a stable DPU environment into FY20F-21F, with upside from acquisitions given adequate gearing headroom.
• Selective redevelopment opportunities, including the unlocking of over 500,000 sqft of untapped GFA, further cements AIMS APAC REIT’s growth profile over the medium-to-long term
• We also note the expiry of the 20 Gul Way master lease in 2019, which may experience some slack in occupancy if efforts to re-commit the space do not progress as planned.

Source: DBS Research - 25 Apr 2019