AIMS AMP (AAREIT SP) - Maybank Kim Eng 2017-10-26: 7.8% Div Yield Offsets Weak Leasing

AIMS AMP CAP INDUSTRIAL REIT O5RU.SI

AIMS AMP (AAREIT SP) - 7.8% Div Yield Offsets Weak Leasing

AIMS AMP (AAREIT)’s 2Q18 results were in line with our estimates, with DPU of SGD 2.55cts, up 2.0% QoQ, but down 7.3% YoY.
Portfolio occupancy fell QoQ from 91.0% to 88.8%, with headline -21.1% rental reversion reflecting a weak leasing backdrop, conversions at 20 Gul Way, and ramping up of its 8 Tuas Ave redevelopment project.

We have kept our forecasts unchanged as we see a recovery lag for industrials against positive macro growth momentum support of the 7.8% div yield, while potential AEI/ redevelopment upside has not been factored in.
Maintain BUY and DDM-based TP of SGD1.60.

The performance reflects an overall weak leasing backdrop for industrial properties during the quarter and conversion pressures at 20 Gul Way.
Portfolio occupancy fell QoQ from 91.0% to 88.8%, but should improve going forward as 8 Tuas Ave 20, which is currently 43.4% occupied, and is being progressively backfilled following its redevelopment.
AAREIT reported -21.1% rental reversion on its expiring leases (2.3% of portfolio), and has YTD renewed more than 40% of its FY18 expiring leases.
Tenancy risk has abated with CWT now at 13.2% of gross rental income, down QoQ from 19.2%, as its master leases expire.

Its redevelopment at 8 Tuas Ave 20, which boosted the property’s GFA by 35% to ~159k sqft, received its TOP on 29 Aug 2017. A 10-year lease with rent escalations has been secured for the ground floor.
Meanwhile, its greenfield build-to-suit (BTS) development at 51 Marsiling Road remains on track for completion in the current quarter, and is pre-committed to Beyonics Int’l on a 10-year master lease with rent escalations.

We have kept unchanged our forecasts and DDM-based TP at SGD1.60. This implies a 7.8% div yield, which is compelling given the potential upside from AEI or redevelopment-led DPU growth.
We see further asset rejuvenation opportunities, with 37.3% gearing, the lowest among small-cap industrial REITs.
We further see ample funding options, given that strong market liquidity for yield has supported ESR-REIT (ESR-REIT, SGD0.57, NR) in raising SGD150m perpetual securities 4.6% yesterday. With 9% of its portfolio GFA under-utilised, we estimate this could generate 5% DPU growth from additional AEI/redevelopment projects.

Earlier-than-expected pick-up in leasing demand for light industrial and logistics space driving improvement in occupancy.
Better-than-anticipated rental reversions.
Accretive acquisitions or redevelopment projects.

Prolonged slowdown in economic activity could reduce demand for light industrial and logistics space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
AUD/SGD volatility which could impede hedging efforts and affect DPU.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-10-26

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.600 Same 1.600