AIMS AMP - Maybank Kim Eng 2016-03-22: Downside priced in

AIMS AMP - Maybank Kim Eng 2016-03-22: Downside priced in AIMS AMP CAP INDUSTRIAL REIT O5RU.SI 

AIMS AMP (AAREIT SP) - Downside priced in 

The downsides are reasonably in the price 

  • We fully factor in the downside risk of 20 Gulway’s possible non-renewal by master tenant CWT, and assume it fully converts to a 90% occupied multi-tenanted property. 
  • We factor in 1% extra vacancies in the rest of the multi-tenanted portfolio to hedge weak demand/strong supply conditions. 
  • Even still, our DPUs are only docked 1-2.8%. 
  • Applying our yield target of 7.5% raises our TP to SGD1.47 from 1.45 for a 10% capital upside, upgrade to BUY. 

Factoring in the downsides 

  • 20 Gulway, AAREIT’s largest and most advanced warehouse property is currently master tenanted with CWT in phases: 20% of the property is contracted till Dec 2016, 42% till 2017, and 38% till 2019. 
  • We assume that 
    1. the property will be progressively converted to multi-tenanted as the master leases expire, 
    2. occupancy of the property will be at c.90% from the 100% as a master lease, and 
    3. underlying rents would be renewed closer to market rents of c.SGD1.36 vs. the current c.SGD1.18. 
  • In addition we take the view that challenging leasing conditions will continue in 2016-17 due to a weak economy and strong supply, and further dock our multi-tenanted occupancy assumptions by 1% over FY3/17-18 to 90.1%. The result is that FY3/17-18 DPU is cut 1.3/2.8% to 11.1/11.5 Scts. 

Redevelopment potential 

  • Portfolio has inherent untapped GFA of 801k sf, which if fully redeveloped can increase NLA by > 8%. 
  • Property yields based on development costs are often in the high single digits. We price in this development potential by tightening our yield target by 25bp to 7.5%. 

Compelling relative value 

  • AAREIT trades at 605bp above the 10yr SGS yield, close to the cycle mean of 629bp. 
  • In comparison, SREITs are now trading at 439bp above the 10yr, which is close to 413bp, -1SD below the mean. 
  • We believe AAREIT represents better relative value compared to the sector, especially with downside risks reasonably factored in.

Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-03-22
Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 1.47 Up 1.45