AIMS APAC REIT - DBS Research 2020-05-14: Organic Growth As A Line Of Defence

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AIMS APAC REIT (SGX:O5RU)

AIMS APAC REIT - Organic Growth As A Line Of Defence

• Rental contribution from 3 Tuas Ave 2 commenced on 1 March 2020.
• Gearing improved marginally to 34.8%, all borrowings due in FY21 have been fully committed to be refinanced.
• Gross revenue fell 4.2% q-o-q to S$28.2m mainly due to the conversion of master leases into multi-tenancy leases.
• AIMS APAC REIT's 4Q20 DPU of 2.00 Scts after the retention of S$2.9m; down 20% q-o-q.

Ongoing conversion of master leases to multi-tenancy leases

• AIMS APAC REIT (SGX:O5RU)'s FY20 results would have been in line with our full-year forecast if not for the retention of S$2.9m of income in 4Q20.
  • S$2.9m of distributable income from Australia was retained to conserve cash; translating into 17% of 4Q20 distributable income.
  • 4Q20 DPU of 2.00 Scts would have been 2.40 Scts if not for the retention of income.
  • FY20 DPU should have been 9.90 Scts but was lowered to 9.50 Scts.
• AIMS APAC REIT's 4Q20 revenue of S$28.2m was 4.2% lower q-o-q mainly due to conversion of master leases to multi-tenancy leases at three properties.
  • 1A International Business Park, 20 Gul Way, 30 Tuas West Road.
• Rental contribution from 3 Tuas Ave 2 commenced on 1 March 2020.
  • 10-year triple-net master lease with rental escalations.
  • Contributed S$0.4m in 4Q20; expected to contribute c.S$4m in rentals per year on a stabilised basis.
• AIMS APAC REIT's NPI for FY20 increased 13.5% y-o-y to S$89.1m mainly due to income contribution from Boardriders (Brisbane) and 51 Marsiling Road.
  • Boardriders Asia Pacific HQ in Brisbane was acquired on 15 July 2019.
  • 12-year master lease with a headline yield of 7.8%, annual rental escalation of 3%.
  • Property expenses were S$9.8m lower y-o-y mainly due to the adoption of FRS116 as well as property tax refund of S$2.3m for 20 Gul Way.
• Property tax rebates of c.S$2.3m will be fully passed on to qualifying tenants.
  • Industrial tenants still remain relatively resilient; more than 50% of tenants are still operating.
  • Tenants from the F&B, retail and trading sectors are more impacted by the current lockdown.
  • Rent arrears and late payments have remained stable, no material increases from before.
  • To assist several tenants with their cashflows, slight deferment in rental payments were granted, i.e. rental payments can be made at the end of the month instead of mid-month.
  • Average of 3.6 months in security deposits.

Loans expiring in FY21 have been fully committed to be refinanced

• A total of S$157m in borrowings will be expiring in FY21, and the refinancing of the entire amount has been committed.
  • A 4-year and 3-year term loan facility has been committed.
  • All-in borrowing costs will be very similar to existing loans; expect borrowing costs to remain flat.
• AIMS APAC REIT has S$181m of committed bank facilities that remain undrawn.
• Gearing improved marginally to 34.8% and all-in borrowing cost remains at 3.5%.
• Healthy interest coverage ratio of 4.3x and weighted average debt maturity will be extended to 3.3 years post refinancing.
• Post refinancing, the next tranche of borrowings that will be expiring will only be due in November 2021.

More than 30,000 sqm of space renewed and signed in 4Q20

• Seven new leases have been signed and 15 leases have been renewed (4.6% of NLA).
  • Renewal leases saw a weighted average decrease of 4% in rentals.
  • Portfolio occupancy was maintained at 89.4%.
• 20.2% of leases (by gross rents) are due to expire in FY21.
  • AIMS APAC REIT is confident of retaining a large portion of expiring leases.
  • Given that leases expiring were signed during the lows in FY17/18, renewals are expected to remain relatively flat or slightly negative at most.
• Part of the CWT master lease will be expiring later this year.
  • In advanced negotiations to retain the underlying tenants directly once the CWT master lease expires.
• King Plastic master lease will be expiring at the start of FY21; could consider converting into multi-tenancy leases or redevelopment.
• Portfolio valuations declined marginally mainly due to a weaker AUD.
  • Cap rates remain relatively stable.
  • Impact of COVID-19 on valuations may only be felt at the next valuation in September 2020.

Suspension of non-critical capex

• Amidst the COVID-19 pandemic, AIMS APAC REIT has been proactively looking at cutting property expenses.
• Non-critical capex such as AEIs and redevelopments will be put on hold for now.
• Long-term acquisition and AEI plans still remain on track, but currently more focused on managing COVID-19 disruptions.

Maintain BUY with a revised Target Price of S$1.40

• AIMS APAC REIT’s results would have been largely in line with our projections if not for the retention of S$2.9m in distributable income.
• The situation remains very fluid at the moment and the retention of income could come in handy in the next quarter when the full impact of the Circuit Breaker lockdown would be felt. We understand that any unutilised retained earnings will be passed back to unitholders.
• See AIMS APAC REIT Share Price; AIMS APAC REIT Target Price; AIMS APAC REIT Analyst Reports; AIMS APAC REIT Dividend History; AIMS APAC REIT Announcements; AIMS APAC REIT Latest News.
• We continue to see potential upside in AIMS APAC REIT once COVID-19 blows over and operations stabilise. The more than 500,000 sqft of untapped GFA should lend support to AIMS APAC REIT’s portfolio valuations.
• Despite a revised Target Price of S$1.40, AIMS APAC REIT still presents a 18% upside to current prices, and a forward DPU yield of 8.4%.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-05-14

SGX Stock Analyst Report BUY MAINTAIN BUY 1.40 DOWN 1.500