AIMS APAC REIT - DBS Research 2021-10-01: Well Worth The Wait


AIMS APAC REIT - Well Worth The Wait

  • AIMS APAC REIT (SGX:O5RU)'s acquisition of Woolworths HQ has finally materialised following perpetual securities issuance.
  • Tight NPI yield of ~5.2% (4.8% post cost) reflects property’s long WALE of 10 years with annual rental escalations of 2.75%.
  • Highly DPU accretive acquisition at ~4% on a full-year basis; S$100m fund raising assumed in our estimates.

Well worth the wait

Accretive acquisition of Woolworths HQ in Sydney

  • Following media reports in September, AIMS APAC REIT has announced the acquisition of Woolworths HQ in Sydney for A$463.3m or S$454.0m. The acquisition will be partially funded by proceeds from their perpetual securities issuance (S$207.5m of the S$250.0m to be utilised) and onshore debt.
  • The property serves as the headquarters for Woolworths Group, who will sign a master-lease for the entire property on a 10-year lease. The terms include four lease extension options of five years each, potentially extending its lease for another 20 years. The acquisition will grow AIMS APAC REIT’s AUM by ~26.6% to ~S$2.1bn, making it the single largest asset in its portfolio. AIMS APAC REIT’s exposure to freehold assets in Australia will increase to 38.4%, and business parks assets will make up ~40% of its portfolio.
  • The property is ~40km from Sydney’s CBD and is nestled in a thriving community of established pharmaceutical and technology companies. Woolworths HQ consists of three interconnected Grade-A office buildings with ancillary amenities, a data centre, a multi-storey car park, and 2 other car parks.
  • In our view, the NPI yield of 5.17% (4.84% including transaction costs) seems tight, especially when compared against the yields of ~5.5%-6.0% for Ascendas REIT (SGX:A17U)’s and Keppel REIT (SGX:K71U)’s business park acquisition in Macquarie Park, Sydney.
  • However, we note that cap rates have compressed since then, and a slight premium on Woolworths HQ is justified given the long lease to one of Australia’s largest and most reputable company.
  • On a full year basis, the acquisition of Woolworths HQ will result in ~4% accretion to DPU. However, the timing difference between the issuance of the perpetual securities and the completion of the acquisition will lead to some dilution to AIMS APAC REIT’s FY22F earnings.

High annual rental escalation of 2.75% per annum

  • In addition to the long lease, it comes with a built-in rental escalation of 2.75% per annum. This translates to a staggering ~S$660,00-S$820,000 increase in annual revenues over the course of its 10-year lease.
  • In our view, the high annual rental escalation adds to the attractiveness of the acquisition, providing organic growth to AIMS APAC REIT’s earnings. This is also especially helpful at a time where interest rates and costs are expected to rise in the long-term.

Potential to increase NLA by four times

  • Another main feature of the acquisition is the potential to expand the asset’s footprint by up to four times in the future. Under current planning rules, the property’s NLA can potentially be increased from ~45,000 sqm to ~180,000 sqm. The B7 business park zoning of the asset allows for other uses including offices, data centres, light industrial, warehouse and distribution centres, and educational facilities.
  • Although we do not expect any redevelopment of the asset in the near-term, the potential to expand its footprint on the 9 ha. freehold site provides AIMS APAC REIT with future organic growth opportunities.

Gearing expected to increase to ~39%

  • Based on a debt-to-perpetuals ratio of 56:44, AIMS APAC REIT’s leverage is expected to increase to ~39.3%. Although this may seem to be within an optimal range, AIMS APAC REIT’s gearing could potentially increase to ~42% when the acquisition of 315 Alexandra Road (total cost of S$106.6m) is completed.
  • Furthermore, we also note that AIMS APAC REIT’s balance sheet appears relatively stretched with a perpetuals-to-equity ratio of ~39%. If we adopt the credit rating agency’s treatment of perpetuals (treat 50% of perpetuals as debt), AIMS APAC REIT’s gearing could potentially go up to ~50%. As such, we have assumed a S$100m equity fund raising by the end of FY22F in our projections.

Our thoughts

  • Although the timing difference between the issuance of the perpetuals and the completion of Woolworths HQ acquisition will lead to some drag on AIMS APAC REIT’s FY22F DPU, we look forward to the property’s full year contribution from FY23. As such, we have rolled forward our valuation for AIMS APAC REIT, while assuming a S$100m equity fund raising by end of FY22, and the completion of the acquisition of 315 Alexandra Road in 4Q22.
  • Based on our new projections, AIMS APAC REIT’s DPU is expected to grow by ~9% in FY23. Although we also note that AIMS APAC REIT’s balance sheet may seem stretched because of its heavy reliance on perpetual securities, our estimates show that the Woolworths HQ acquisition is DPU accretive even if there was an equity fund raising exercise.
  • We continue to like AIMS APAC REIT for its growth trajectory and this acquisition demonstrates its ability to compete for quality income-producing assets by staving off competition from the likes of Centuria, Charter Hall and Growthpoint. Going forward, Woolworths HQ will account for ~15% of AIMS APAC REIT’s revenues and may pose a concentration risk, but we believe that this risk is mitigated by the credibility of the tenant and the income stability from the long lease.
  • On a valuation basis, AIMS APAC REIT currently generates a relatively attractive forward yield of 6.0% and 6.5% for FY22 and FY23, respectively. Its recent inclusion into the FTSE EPRA NAREIT Developed Asia Index will further boost AIMS APAC REIT’s trading liquidity as it continues to grow its portfolio. As such, we upgrade AIMS APAC REIT to BUY, on an unchanged target price of S$1.60.
  • See

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-10-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.600 SAME 1.600