AIMS APAC REIT - DBS Research 2019-11-27: Opting To Stay


AIMS APAC REIT - Opting To Stay

  • Renewal of largest tenancy on a 12-year master lease; 3.25% annual rental escalation.
  • Optus Centre valuation increased by A$100m after lease extension and property AEI.
  • Portfolio WALE extended from 2.45 years to 3.80 years.
  • Maintain BUY with unchanged Target Price.

Maintain BUY; better income visibility.

  • Being predominantly focused on Singapore, we like AIMS APAC REIT (AAREIT, 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 growth ahead of the sector’s anticipated recovery in 2020.
  • AIMS APAC REIT has just secured the renewal of its largest tenancy on a 12-year lease with annual rental escalations of 3.25%. Together with its latest acquisition of Boardriders APAC HQ in July 2019 – a light industrial facility in Gold Coast, Australia, we find dividend yields of c.7.2% attractive. See AIMS APAC REIT Dividend History.

Renewal of Optus lease

  • AIMS APAC REIT has renewed lease with Optus Administration at Optus Centre, Macquarie Park, New South Wales, Australia.
  • Optus Centre is fully occupied, and the lease is due to expire in phases between 2021 and 2023. Optus contributes 12.3% of total portfolio GRI and is AIMS APAC REIT’s largest tenant.
  • The 12-year renewal will commence from middle of 2021 following the completion of an AEI to cater to Optus’s requirements.
  • There are also two options in place to further extend Optus’s lease for an additional 10 years in total. An annual rental escalation of 3.25% has been in-built into the lease with first year NPI of A$28.3m that will average to A$36.5m over the 12-year lease (after taking into account rental incentives).
  • We understand that renewal rents and rent incentives are in line with current market rates for big leases in the same suburb. For the renewal of such a large space (NLA of more than 906,000 sqft) on a 12-year long lease, we estimate that rent incentives are around the 30% level.
  • See AIMS APAC REIT Announcements; AIMS APAC REIT Latest News.

Property value increased by A$100m

  • AEIs to enhance facilities to meet Optus’s needs will be carried out at the property but it will remain operational throughout.
  • A valuation uplift of A$100m (from A$470m to A$570m) for the property was mainly due to capex spent and lease extension.
  • Based on AIMS APAC REIT’s 49% share of the asset, the new implied valuation to the portfolio will be A$279.3. This translates into a c.21.3% increase in valuation as compared to 30 September 2019.
  • New valuation is a 51.4% increase from AIMS APAC REIT’s acquisition price in 2014. The uplift in valuation will increase NAV from S$1.32 to S$1.38.
  • We estimate that c.A$60m was spent on the AEI at Optus Centre; portfolio gearing will creep up by c.1% if there are no changes to portfolio valuations.

Improved portfolio metrics

  • With the 12-year renewal, Optus Centre’s WALE will increase to 13.6 years. AIMS APAC REIT’s portfolio WALE will increase from 2.45 years to 3.80 years.
  • Lease expiries in 2021, 2022 and 2023 will decrease by approximately 4% per annum from the current 22.9%, 27.9 and 12.4% respectively.
  • With the renewal of the largest tenancy secured, only Eurochem’s lease expiry at the end of 2019 remains to be ironed out.
  • Eurochem contributes 7.2% to portfolio GRI and is the fifth largest tenant.

Forward earnings looking positive

  • New Optus lease is expected to be approximately c.5% lower than expiring lease. However, due to the gradual expiry of the current lease, decline in contribution from Optus Centre will be minimal.
  • Full income contribution from Boardriders APAC HQ that was only completed in July 2019, from 2020 onwards. Boardriders is on a 12-year master lease with a 3.0% annual rental escalation; currently making up 2.3% of portfolio GRI.
  • Redevelopment of 3 Tuas Avenue 2 is expected to complete in the first half of 2020. Entire property has been leased to a global medical company on a 10-year lease with rental escalations every two years. The Tuas redevelopment is expected to contribute an additional c.$3.5m to NPI per annum.
  • Borrowing costs lowered from 3.6% to 3.5% q-o-q; issued S$100m 5-year fixed rate notes at 3.6%

Our thoughts

  • The extension of the master lease ahead of expiry will boost AIMS APAC REIT’s earnings visibility in the near-to-medium term; especially when Optus is the largest tenant contributing 12.3% of gross rental income (GRI). While the initial rent is estimated to be slightly lower than the expiring rent; we see positives from securing the tenant for a long-term lease tenure.
  • The annual escalations will bring cashflows back up in the longer-term.
  • Further improvement to earnings with additional contribution from Boardriders APAC HQ, and contribution from 3 Tuas Avenue 2 redevelopment from 2H20.
  • Watch out for the rental rates for Eurochem’s renewal in the next quarter and the ability to lease out any potential returned space.
  • We reiterate our BUY call and Target Price of S$1.50 for AIMS APAC REIT. See AIMS APAC REIT Share Price; AIMS APAC REIT Target Price.

Where we differ:

  • We see AIMS APAC REIT as being unique for its c.600,000 sqft of untapped gross floor area (GFA) - one of the largest 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 13.9% and 7.9% respectively.

Prime acquisition candidate?

  • With consolidation 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 6.5% would place it at the upper end of its peer range of 5.1-6.6%.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-11-27
SGX Stock Analyst Report BUY MAINTAIN BUY 1.500 SAME 1.500