AIMS AMP Capital Industrial REIT
• Intrinsic Value S$1.740
• Prev Close S$1.660
Another Huge Redevelopment in the Pipeline?
AIMS AMP Capital Industrial REIT (AA REIT) posted a healthy set of FY13 results with revenue in-line with our projection and DPU outperforming our expectation by 0.58 S cents. The latter was backed by 0.30 S cents of capital gains on the back of the 31 Admiralty Road divestment, 0.09 S cents of retained distribution and better than expected contribution from the 20 Gul Way Phase 1. 4Q gross revenue rose 10.0% QoQ to S$23.8m (excluding the S$4.1m of recovery in property tax on 27 Penjuru Lane in 3Q) while NPI inched up 5.2% QoQ to S$15.5m. The weaker rise in NPI can be partially explained by the lower occupancy rate, which fell 2.4% points QoQ to 96.1%. Management remains optimistic about the outlook, as they are currently in active discussions with a few companies on the available areas.
We expect AA REIT’s DPU to improve on the back of 20 Gul Way Phase 2 and the Defu Lane redevelopment. There is also a possibility of 20 Gul Way Phase 3 due to the higher plot ratio approved by the URA. That said, AA REIT’s current share price is nearing to our revised valuation and we are now recommending a Fairly Valued rating with an intrinsic value of S$1.740.
Healthy Lease Renewal: 16 leases were renewed in 4Q FY13 with a weighted average rental increase of 18.0%. The rental increase is largely in line with the 3Q figure.
20 Gul Way Phase 3??: AA REIT had on today announced that URA had approved to rezone the plot ratio at 20 Gul Way from 1.4 to 2.0. This will allow AA REIT to develop another 497,000 sq ft of GFA to the asset, most probably at the current marshaling yard, which has no fixed structure. We estimate a project redevelopment cost of around S$70m (assuming S$140 psf) and AA REIT will probably need to tap onto the equity market as the gearing level will be 40+% if the deal is fully debt funded.
Company Updates: The speculated 20 Gul Way Phase 3 can only take place after the Phase 2 is completed due to the 10% development limit. That said, Phase 2 is expected to receive TOP in June 2013, six months ahead of schedule. Income will flow in once the three month rent free period ends.
There was also a gradual portfolio value uplift of 1.9% for AA REIT, mainly due to higher valuation of the 8&10 Pandan Crescent property and 29 Woodlands Industrial Park E1. Management also reiterate the possbility of future investment opportunities in Australia, though we reckon that it will depend on the structure of any such ventures during that time.
Average industrial REITs yield have declined from 6.90% since the beginning of the year to 6.15% currently, as investors deem REITs as a safe haven that offers defensive yield. We reckon that the trend is likely to continue following the recent sharp movement in gold price. AA REIT’s corporate bond also showed some strength, with the 2016 4.9% corporate bond trading with a YTM of merely 3.3%. This also reflects the market’s preference for safer assets.
Forecast and Valuation: We are leaving our FY14 forecasts largely intact despite the possbility of a 20 Gul Way Phase 3, as the amount of capital raising and construction costs are still not confirmed. Nonetheless, we are increasing our LT growth rate assumptions to 1.9% in view of the opportunities available. AA REIT’s share price has soared substantially since our first initiation of S$1.075 about 13 months ago. Though our intrinsic value is S$1.74, we are recommending a Fairly Valued rating as the upward drift in share price is faster than our changes in valuation.
Publish date: 16/04/13