• AIMS APAC REIT's resilient 2QFY20 performance backed by strong occupancies.
• Watch for upcoming expiry of Eurochem’s master lease; downside risk is manageable, in our view.
• New bond issuances for near-term refinancing needs.
• Maintain BUY with unchanged Target Price.

2Q20 DPU of 2.50 Scts in Line With Expectations

• AIMS APAC REIT (SGX:O5RU)’s 2Q20 gross revenue of S$30.6m is comparable to 1Q20, mainly due to maiden rental contribution from the recently acquired Boardriders Asia Pacific HQ in Gold Coast, Queensland, Australia and higher rental and recoveries at 8 Tuas Avenue 20 and 1 Bukit Batok Street 22. See AIMS APAC REIT Announcements. The increase was offset by lower rental for the properties at 20 Gul Way, 27 Penjuru Lane and 30 Tuas West Road.
• One phase of 20 Gul Way and one phase of 30 Tuas West Road had been converted from master leases to multi-tenancy leases during the quarter. Portfolio occupancy declined from 94.4% to 92.2% q-o-q mainly due to 20 Gul Way and 27 Penjuru Lane.

Gearing Inched Up Slightly to 35.4%

• Decline in valuation of investment property and property under development mainly due to adoption of FRS 116 (S$1.3m adjustment); 2Q20 gearing inched up 1.6% q-o-q accordingly.
• Overall blended cost of debt fell slightly to 3.5% in the quarter. There should be further savings in cost of debt when S$30m fixed rate notes due in December 2019 (4.35% currently) are refinanced.

Healthy Portfolio Performance

• Leases amounting to 10.1% of total NLA have been renewed and signed in 1H20, leading to overall positive rental reversions of 1.2%.
• Portfolio occupancy of 92.2% was due mainly to the transitional period where master leases are converted to multi-tenanted leases. Redevelopment of 3 Tuas Ave 2 is expected to be completed in the first half of 2020, and AEI of NorthTech at Woodlands is on track to be completed by the end of 2019.
• Eurochem Corporation’s (7.2% of GRI) lease will be expiring at the end of 2019, and the company has indicated that it will return some space during renewal. AIMS APAC REIT indicated that it will be converting this returned space to multi-tenanted leases.
• King Plastic’s (1.6% of GRI) lease will be expiring soon, and AIMS APAC REIT plans to carry out AEI at 541 Yishun Industrial Park A after the space is vacated, with potential to increase untapped GFA.
• Looking forward, the manager is expecting to see dissipating pressure on rental reversion which is likely to tail off from next year onwards.
• AIMS APAC REIT continues to be on the lookout for potential acquisitions in Singapore and Australia, with the former currently presenting some yield-accretive opportunities.

We Maintain Our Target Price of S$1.50 and BUY Call on AIMS

• Despite the upcoming expiries of two of its top 10 tenants, the conversion of the returned space to multi-tenanted leases may lead to further positive rental reversions. Moreover, contribution from NorthTech at Woodlands will increase once AEI works are completed at the end of the year.
• In the middle term, the completion of the redevelopment of 3 Tuas Avenue 2, coupled with the AEI and increase in GFA at 541 Yishun Industrial Park A, will improve earnings.
• See AIMS APAC REIT Share Price; AIMS APAC REIT Target Price; AIMS APAC REIT Dividend History.

Source: DBS Research - 7 Nov 2019