Illuminated by master lease extension
- FY22 DPU of 9.46 Scts beats our estimates
- Renewal of master lease with Illumina for another 10 years at a c.16% positive rental reversion
- With gearing already near optimal levels, we assume some equity fundraising for its future acquisitions
- Maintain BUY with revised TP of S$1.55
Investment Thesis
Maintain BUY, revised TP of S$1.55. AIMS APAC REIT (AAREIT) has delivered on acquisitions to drive DPU growth of c.6% in the past year and we expect the growth trajectory to continue. However, with gearing already at optimal levels, we assume further growth will require some equity fundraising.
Potential for further organic growth in portfolio. In addition to the potential to tap into unutilised GFA of more than 500,000 sqft within its Singapore portfolio, Woolworths HQ presents the opportunity to leverage on a further c.1.5m sqft of unutilised GFA. Moreover, the annual rental escalations for its master leases provide for organic revenue growth of c.1%-3%.
Looking to the next accretive acquisition. Following on from the acquisition of Woolworths HQ in Sydney, we look forward to the completion of the acquisition of 315 Alexandra Road in Singapore. With the stock’s recent inclusion into the FTSE EPRA NAREIT Developed Asia Index, we believe the improved trading liquidity of AAREIT and potential lowering in cost of equity would enable it to embark on further accretive acquisitions despite the stiff competition for good-quality income-producing assets.
Valuation:
Maintain BUY; DCF-based TP of S$1.55. Our target price of S$1.55 is based on DCF methodology. Our assumed discount rate is 6.2% (risk-free rate of 3.0%). Our target price implies target yield of 6.2% (FY23F) and P/NAV of 1.1x.
Where we differ:
We have factored in some fundraising for the next acquisition. In our view, our estimates are conservative, as we have assumed a potential equity fundraising of c.S$52.4m to fund the acquisition of 315 Alexandra Road and manage its balance sheet. Equity fundraising of less than that presents an upside to our earnings estimates.
Key Risks to Our View:
Key risks include further delays in the completion of the 315 Alexandra Road acquisition.