AIMS APAC REIT - DBS Research 2019-05-16: Surfing Into The Gold Coast

AIMS APAC REIT (SGX:O5RU)

AIMS APAC REIT - Surfing Into The Gold Coast

Proposed acquisition of Boardriders APAC HQ in Gold Coast for A$38.46m.
Attractive headline yield of 7.8%; accretive transaction to boost pro-forma FY19 DPU by 0.8%.
Long WALE and built-in rent escalations of 3% p.a. bodes well for income visibility and growth.
Maintain BUY as FY20-21F yields are further enhanced to c.7.5% p.a.

Being predominantly focused on Singapore, we like AIMS APAC REIT (AA 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, AA REIT offers investors a higher degree of income certainty ahead of the sector’s anticipated recovery in 2020.
With AA REIT’s latest acquisition of Boardriders APAC HQ – a light industrial facility in Gold Coast, Australia, further enhances dividends yields to 7.5% p.a. over FY20-21F, which is attractive. See AIMS APAC REIT's dividend history.

We see AA REIT as unique for its c.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.

With consolidations among industrial real estate investment trusts (REITs) in focus, we believe that 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%.

Maintain BUY; DCF-based Target Price of S$1.50, which assumes terminal growth rate of 1.5%.
The redevelopment of AA REIT’s underutilised sites could raise its fair value to S$1.58.

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

AIMS APAC REIT (AA REIT, SGX:O5RU) announced that it has entered into a contract of sale with vendor, GSM Rocket Australia to acquire Boardriders APAC HQ, a light industrial facility in Gold Coast.
Located in the suburb of Burleigh Heads - an established industrial, commercial, retail and residential suburb near Surfers Paradise, the property sits on a 3.33 ha freehold site and comprises a purpose-built warehouse, office building, and a two-storey retail space, with total NLA of 14,833 sqm.

The purchase consideration reflects latest the independent valuation of A$38.46m (~S$36.92m) by CBRE and including transaction-related expenses, would be c.A$41.50 m.
The property will be leased back to GSM (Operations) Pty Ltd, a wholly owned subsidiary of actions sports and lifestyle company Boardriders Inc, which designs, produces and distributes branded ready-to-wear apparel, footwear and accessories under globally-recognised brands including Quiksilver, Billabong, Roxy, DC Shoes, RVCA and Element.
The lease will have an initial term of 12+5 years, and is structured on a triple net lease basis, with fixed rent escalations of 3% p.a. and rent review commencing in Year 7 of the lease. This provides AA REIT with a new steady long-term income stream, and potentially higher growth post its mid-term rent review. Given first year NPI of A$3m, implies an attractive headline NPI yield of 7.8% (or 7.2% post-cost).

We understand that the acquisition will be fully funded by AUD denominated debt, which would take pro-forma gearing from 33.7% (4Q19) to 35.5%, leaving ample headroom for further redevelopment and acquisition opportunities ahead. While the acquisition may not be sizeable, is estimated to increase pro-forma FY19 DPU by c.0.8%

This acquisition marks AA REIT’s second property investment in Australia, which would diversify the REIT’s exposure in Australia from 13.1% to 15.1% of GRI. Attractive near-term purchase considerations aside, we believe that the acquisition was also partly driven by positive economic tailwinds in Gold Coast such as population growth, major infrastructure developments and anticipated increases in domestic and offshore tourism into the region.
According to industry experts, the population at Gold Coast is set to experience a period of immense growth ahead, increasing by 62% to over 928,000 by 2041, which will be supported by major infrastructural developments. In
November 2018, the City of Gold Coast announced that Stage 3A of the Gold Coast Light Rail – which includes eight new light rail stations pedestrian, cycling and bus interchange facility upgrades, will be fully operational by 2023.

Whilst investors enjoy stable income visibility from the acquisition, aerial views of the asset also point towards potential for upside surprise over the longer-term given the asset’s favourable positioning within a vibrant residential locale. This could open new redevelopment and value-maximising opportunities for AA REIT over time, which have yet to be factored into our estimates.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-05-16

SGX Stock Analyst Report BUY MAINTAIN BUY 1.500 SAME 1.500