AIMS APAC REIT - DBS Research 2021-05-06: Unfolding Of Hidden Value


AIMS APAC REIT - Unfolding Of Hidden Value

  • Strong acquisition momentum from recent acquisitions coupled with robust organic growth to drive a 11% growth in DPU.
  • Potential conversion of selected assets to data centres a positive surprise, if it happens.
  • Hidden value within the portfolio makes AIMS APAC REIT an attractive takeover candidate.

Improving fundamentals to drive a re-rating

Strong results underscore solid fundamentals.

  • AIMS APAC REIT (SGX:O5RU) reported a robust set of results ahead of expectations, with its FY21 DPU of 8.95 cents that is 2.9% above our estimates. There were many positives in our view, mainly from
    1. better-than-expected rental performance and
    2. lower rental reliefs that were needed to be disbursed as tenants’ performance rebounded off the COVID-19 pandemic lows. This was also complemented by additional income from new master lease at 541 Yishun Industrial Park A and from 7 Bulim Street, a recent logistics property that was acquired.
  • Share of profits from JV was higher mainly due to revaluation gains of S$20.7m in 4Q21 with S$1.1m of retained income from 4Q20 having been released this quarter (completed the payment of all retained income), indicating the manager’s confidence in maintaining a growing DPU profile going forward.

Positive rental reversions driven by logistics leases, robust organic growth expected.

  • The manager completed the signing and renewal of more than ~1.1m sqft of leases. Out of the renewals, ~0.8m sqft saw an average 2.3% positive reversion. These positive rental reversions are attributed to lower expiring rents for warehouses (signed three years ago) while new leases of ~350,000 sqft came mainly from 3PL logistics firms.
  • Looking ahead, we remain confident that AIMS APAC REIT is able to deliver robust organic growth given ~14% of the 24% of leases expiring in FY22 will come from logistics/ warehouse properties. The remaining 6% are from high-tech industrial properties and 4% from light/general industrial where reversionary trends are expected to remain largely positive, with high tenant retention.

Slight dip in portfolio valuations amid the COVID-19 pandemic; impact on NAV remains marginal.

  • Singapore properties saw some revaluation losses as valuers implied lower rental assumptions going forward supported by stable cap rate. Revaluation gains were reported for its Australian portfolio mainly due to cap rate compression.

Leverage within optimal range post-acquisition; fund-raising possibilities if acquisition momentum picks up.

  • AIMS APAC REIT's gearing remained stable at 34% in 4Q21 and is expected to increase to 38-39% after the completion of the 315 Alexandra Road acquisition. Borrowing costs improved 0.5% y-o-y to 3.0% currently. We may see further savings in borrowing costs when the S$31m loan due in November 2021 is refinanced, which we have not priced in.

Onward to deliver growth; optimise portfolio.

Focusing on portfolio rejuvenation in FY22; increasing focus on logistics “not priced in”.

  • We see a myriad of growth opportunities that the manager can execute on with possible strategic acquisitions in Singapore and Australia that complement its portfolio. The manager is also actively looking at build-to-suit (BTS) opportunities in Singapore which will likely come with solid tenant credit and long weighted lease expiry (WALE) profiles. The manager is mindful of the tightening cap rate environment in Australia and will remain selective in its acquisition strategy there.
  • The manager intends to constantly embark on minor asset enhancement initiatives (AEI) for selected assets – especially its Business Park property to refresh the product in the bid to attract tenants.
  • In FY21, AIMS APAC REIT’s portfolio exposure to the logistics sector grew from 28% to 35% currently, and this segment is expected to contribute further growth in FY22. Portfolio occupancy remains high as logistics and 3PL firms continue to drive demand and leases expiring in this segment are expected to report steady organic growth going forward.

A possible data centre play?

  • We remain excited that the manager is constantly reviewing options to best utilise its assets. With more than 500,000 sqft of untapped GFA, we see AIMS APAC REIT like a “goldmine” of valuable land bank to extract value. We understand that there is potential to convert several assets into data centres once the moratorium is lifted, which we believe will be value enhancing for the REIT and well supported by unitholders.
  • With significant upside in GFA to be tapped, we believe that AIMS APAC REIT remains an attractive takeover target at 1.0x P/NAV with upside coming from the maximation of its portfolio GFA. With ample liquidity chasing stable industrial assets in Singapore (i.e. Blackstone recently completed the acquisition of Soilbuild REIT for more than S$700m and continues to add more assets), coupled with a significant shareholder in ESR, AIMS APAC REIT remains a potential takeover target.

Strong earnings momentum expected in FY22; raising estimates by 4-6%.

  • We remain optimistic that AIMS APAC REIT can deliver close to pre-pandemic earnings and project a strong 11% rebound in DPUs in FY22. This is on the back of recovery in earnings and contribution from recent acquisitions; we raise our DPU estimates by 4-6% to account for
    1. better-than-expected rental growth and occupancies, and
    2. lower-than-projected interest costs.

Room for yields to compress further.

  • AIMS APAC REIT is currently trading at a forward yield of 7.2%, significantly higher than the industrial S-REIT average of 4.9%. The 5-year historical yield spread between AAREIT and the sector is 150bps. This implies that AIMS APAC REIT’s yield has the potential to compress by a further 80bps, which we believe is justified.
  • AIMS APAC REIT’s P/NAV multiple is currently at 1.01x, trailing the sector average of 1.46x. The 5-year average P/NAV spread between AIMS APAC REIT and the sector is 0.31, which implies that AIMS APAC REIT’s P/NAV multiple should be trading at up to 1.15x, implying at least a 15% total return on fair value basis.

Maintain BUY call with revised target price of S$1.60.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-05-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.60 UP 1.400