AIMS AMP Capital Industrial Reit

Voyage Research, Nov 26

AIMS AMP Capital Industrial Reit (AA Reit) has announced the proposed acquisition of a 49 per cent indirect interest in Optus Centre in Australia for about S$215 million.

The asset is a secure A Grade business-park office with a total lettable area of 84,194 sq m. The current rental rate is approximately A$290/sq m with fixed annual escalation of 3 per cent.

The asset is fully let to Optus Administration Pty Ltd and guaranteed by Singtel Optus Pty Ltd. The weighted average lease term of the asset is about 8.6 years, with an additional five-year renewal option.

The stake is purchased near the open-market value of S$215.4 million. The entire deal will be debt-financed, with a new five-year term loan facility of A$110.7 million and S$120 million from an existing SGD/AUD revolving credit facility.

Positive terms of the deal:

1) Quality tenant with long-term lease and built-in rental escalation;

2) Reasonable NPI (net property income) yield of about 7.9 per cent;

3) DPU (distribution per unit) accretive and will boost DPU by about 0.58 Singapore cent annually.

However, we are mindful of the leverage ratio, currency risk and unnecessary diversification. In particular, the borrowings/total assets will trend towards 41 per cent by FY2016 if we were to take into consideration AA Reit's existing project pipeline.

Management has commented that they have financial flexibilities in place (some of their assets are not collateralised) and part of the currency risk is hedged.

We retain our FY14 forecast dividend payout of 11 Singapore cents per share and increasing the FY15 forecast and FY16 forecast dividend payout by 0.6 Singapore cent. We also increase the cost of equity to 8.5 per cent to account for the additional risks. Maintain "Invest" with S$1.73 intrinsic value.

INVEST