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

AIMS APAC REIT (SGX:O5RU)

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.

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.

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.

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.

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.

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%

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.

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.

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