Category: AIMSAMPIReit
AIMSAMPReit – OSK DMG
T.O.P Way Ahead of Schedule
AAREIT announced that it received the Temporary Occupation Permit (TOP) for Phase Two of 20 Gul Way on 7 May. Although we had expected early completion for this phase, the announcement is a pleasant surprise as it beats our expected date by two months. We maintain our positive view on AAREIT as it is set to announce plans for Phase Three of 20 Gul Way in the near future.
Additional income due to earlier-than-expected completion. Phase Two of the 20 Gul Way development comprising c. 488,247 sq ft has been pre-leased to CWT Limited for up to five years, with an annual escalation of 2%. The TOP for this development was obtained approximately seven months ahead of schedule and within budget. Due to the early completion, rental payments will commence on 7 July, giving AAREIT two extra months of income (c. SGD1.1m above our previous forecast).
Unlock value by transforming its properties. With the completion of both phases of 20 Gul Way, the property management company’s annual rental income is expected to increase from SGD3.6m (as at 31 March 2011) to SGD16.3m, which will translates into an initial net property income yield of 8.1%. Such endeavours have successfully demonstrated the trust’s ability to reposition itself and unlock value by transforming 20 Gul Way into the largest and newest asset in its portfolio.
Awaiting plans for Phase Three. Recently, AAREIT announced that the Urban Redevelopment Authority (URA) has given approval in principle to the manager’s application to rezone the plot ratio at 20 Gul Way from the existing 1.4x to 2.0x. The approval allows it to develop a further 497,000 sq ft of gross floor area at the property. As Phase Two is now completed, we expect AAREIT to announce plans for Phase Three of the development in the near future.
Strong execution of development projects. Although the additional income will have a minimal impact (c.1.6%) on the trust’s FY14 net income, we view this piece of news positively as it demonstrates AAREIT’s capability in undertaking development projects. In view of this, we maintain our BUY rating on AAREIT, with an unchanged SGD1.90 TP, as we expect smooth execution of its development projects in the upcoming years.
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.
Industrial REITs – OCBC
2Q12 RESULTS ROUNDUP
•Interim results matched projections
•Positive performance to carry on
•Good capital and lease management
Consistent set of results
Industrial landlords continued to deliver, meeting expectations for 2Q12. YoY growth in NPI ranging from 3.9-26.4% was seen among the REITs, bolstered by contribution from completed developments/ acquisitions, positive rental reversions and improved operational performances. Mapletree Industrial Trust was the top performer for the quarter, raking up 14.1% YoY increase in DPU. This was followed closely by Cambridge Industrial Trust and Ascendas REIT, with 13.9% and 10.3% growth respectively. Only AIMS AMP Capital Industrial REIT (AAREIT) and Cache Logistics Trust (CACHE) saw a sequential decline in DPU. However, this was due to the absence of distribution in retained income seen in 1Q by AAREIT. For CACHE, we note that it was attributable to an enlarged unit base arising from private placement to fund the acquisition of Pandan Logistics Hub, even though the property has yet to contribute to its income.
Positive outlook remains
Going forward, we believe that industrial REITs will likely maintain their financial performances. While most of the landlords acknowledge that the macroeconomic landscape has remained uncertain and volatile, they expect stable results from their portfolios, driven by contribution from recent investments and healthy leasing activities in the industrial space. A few industrial REITs also cited the possibility of further positive rental reversions, as current market rents are still above the passing rents at some of their assets.
Occupancy rate and gearing remained at healthy levels
Industrial REITs, we note, have also done well on their lease and capital management. The subsector average occupancy rate as at 30 Jun stood at 98.4%, representing a 60-bp improvement QoQ, while the weighted average lease to expiry held steady at 3.6 years. This reflects active portfolio management and continued strong demand for industrial property. In addition, the subsector aggregate leverage average was still comfortable at 33.5% (vs. 33.9% in 1Q). As such, we maintain our OVERWEIGHT rating on the industrial REIT subsector. Cache Logistics Trust remains our preferred pick, given its attractive FY12F DPU yield of 7.6% and robust portfolio.
AIMSAMPReit – Kim Eng
Making good progress in restructuring
Background: AIMS AMP Industrial REIT (AAREIT) was originally listed as Macarthur Cook Industrial REIT in 2007. However, the trust ran into liquidity problems during the GFC, as it had a debt of SGD202.3m due on 17 Apr 2009, along with an unfunded SGD90.2m contractual obligation to acquire 1A International Business Park. Meanwhile, the trust’s sponsor, Macarthur Cook Limited, was acquired by the AIMS Financial Group in Jul 2009, which resulted in the latter being the new sponsor of the trust. AAREIT’s principal investment objective is owning and investing in a diversified portfolio of income-producing industrial real estate assets in Singapore and Asia including warehouse and logistics centres, manufacturing facilities, business parks, and hi-tech spaces.
Why are we highlighting this stock? We recently met up with Management to find out more about the trust, in view that the counter has risen by 29.6% YTD and offer an attractive DPU yield of ~9% (one of the highest amongst Industrial REITs). It presently has 25 properties valued at SGD914.5m as of 31 Mar 2012. AAREIT is also redeveloping 20 Gul Way that will quadruple its annual rental income and triple its gross floor area on that property when fully completed in Dec 2013.
Our view
• Attractive DPU Yield. DPU grew by 5.3% in FY12 to 10.45 SG cts. Upon the completion of 20 Gul Way, management would expect incremental DPU to be 1.465 SG-cts and AAREIT would become the second-largest ramp-up warehouse landlord after CACHE. According to street estimates, FY13 DPU yield is forecasted at 9.2%. (DPU of 11.3 SG cts). AAREIT’s aggregate leverage remains healthy at 30% as of 31 Mar 2012. We note that AAREIT’s gearing may escalate to ~35% after the redevelopment of 20 Gul Way (SGD150m debt-financed).
• All Singapore-based assets. AAREIT enjoys high portfolio occupancy of 99.2% with an average security deposit of about 8.1 months per property. It has divested several low-yields properties such as 23 Changi South, Asahi Ohmiya Warehouse, and 31 Admirality Road in 2011–2012. It also has six properties, apart from 20 Gul Way, whose plot ratio utilisation is below 60%, thus making them potential candidates for redevelopment. AAREIT is presently in a sweet spot with its exposure in the logistics and multi-factory space (price index rose by 31.6% and 25.4% YoY in 1Q12, respectively).
• Risk. Downside risks, in our view, include a relatively short lease expiry of 2.62 years. Two large assets, 27 Penjuru Lane and 8&10 Pandan Crescent, are expiring in FY13. However, overall lease expiry has been reduced from 29.9% in end-Mar to 18% in end-Jun (incl. subleases), following lease extensions. There are also varying degrees of: (a) concentration risks as the top ten tenants constitute 70.5% of 4QFY12 rental income; (b) competition risks over tenants and assets; and (c) macro-economic headwinds. Upside risks include more yield-accretive acquisitions, redevelopment projects, and better-than-expected positive rental reversions moving forward.
AIMSAMPReit – BT
AIMS AMP beefs up asset quality for better returns
Over 20% of Reit's portfolio undergoing enhancements
AIMS AMP Capital Industrial Reit intends to "sweat" its assets over the next few years by raising the overall quality of its portfolio to provide better returns for its shareholders, said Andrew Bird, director of AMP Capital's property and management business.
With more than 20 per cent of its current portfolio in Singapore undergoing asset enhancements, the industrial real estate investment trust (Reit) intends to focus on improving the quality of its overall assets this year, instead of acquiring new properties.
In particular, Mr Bird, who was also newly appointed as chairman of the board of AIMS AMP Capital Industrial Reit Management (the Reit's manager) yesterday, said that with the completion of the group's $155 million development at 20 Gul Way later this year, the Reit's portfolio – comprising mainly warehouse and logistics assets – which currently stands at around $940 million, is expected to cross the $1 billion mark.
The soon-to-be completed asset at Gul Way (which has already been fully pre-committed) is also expected to enjoy positive rental reversions upon completion, and is forecast to boost the Reit's overall distribution per unit (DPU) by 15 per cent once cashflow starts rolling in.
Said Mr Bird: "The Gul Way property is a great example of us adding value to existing assets. So rather than going out and doing aggressive acquisitions and capital raisings we are seeking to add value to assets we already have thus moving the quality of assets up which is a good thing for investors."
He also added that another part of their strategy would be to sell some of its smaller, lesser quality assets with the final aim to "unlock better returns" for the Reit's overall portfolio.
Commenting on rising concerns over a potential supply glut in the industrial space segment, Mr Bird said: "Markets go up and down whether it is in Singapore or elsewhere in the world. The manager's job is to look forward over the horizon to see where the opportunities are and manage the portfolio to the best of their ability to maximise shareholder returns."
He also pointed out that demand continues to outstrip supply for quality warehouse assets in Singapore, an area that the Reit specialises in, and it remains confident of its outlook going forward.
But touching on the topic of the counter's lacklustre liquidity triggered a more furrowed expression on the face of the industry veteran.
Despite having one of the highest yields in the local Reit universe, the listed counter has been suffering from bouts of poor investor interest over the past few years.
"That is one of the things we are very focused on as a sponsor and shareholder. This is very close to our hearts," he said.
Fortunately, efforts have been starting to pay off of late, with institutional interest picking up over the past few months, said Mr Bird, who also attributed the higher trading volumes to a five-for-one share consolidation carried out sometime last year.
That said, the leader admitted that liquidity continues to remain an issue despite the improvement in trading activity over the past six months, and said he will continue working on sprucing up the Reit's overall marketability to investors in the coming months.
"We have built steady momentum in the trust and we need to continue that on," he said.
Since the start of the year, the industrial Reit has rallied by 24 per cent, outperforming many of its sector peers.
Yesterday, the counter closed half a cent or 0.4 per cent lower at $1.185.