AIMS AMP Capital Industrial REIT (AA REIT) 2QFY17 Review

Occupancy

Occupancy has been falling year on year from 2013 was 96.1% to the current 92.7%, one of the attribute was the master lease has been dropping to 8 master lease as of 2Q17.
Following are the lease expiry for AA REIT

1. 9% in the remaining FY17
2. 29.4% in FY18
3. 17.9% in FY19
4. 13.8% in FY20

In 1Q17,AIMS AMP has negative rental revision of -1.6% and in 2Q17 it has negative rental revision of -11.1%. Assuming the next 9% will have negative rental revision of -11%, it will have another loss of around 1.2m. This loss could be substitute by 30 and 32 Tuas West Road property that will be income generating in 2017 with around 4m gross revenue and CWT will be the master tenant.

The challenge will be FY18,
There will be three master leases expiring in FY18, those are 20 Gul Way (progressive expiry over four years from FY17 onwards), 3 Tuas Avenue 2 and 2 Ang Mo Kio Street 65. These three master leases constitute approximately half of the expiries in FY18 and 29.4% based on 2QFY17 will be around 35m.

With the current outlook, using negative rental revision refer to 2Q17 there will be a loss of around 3.8m and this provided those 3-master leases do extend their lease and the rest of tenant renew their lease. The key here will be CWT as based on FY16 the total gross revenue of 2 other property is around 4.3m, so CWT will account around 12m.

In the past AIMS AMP has been converting master lease to multi tenant from 13 master lease to 8 master lease.

1. 10 Soon Lee Road, Singapore was 0.81m in 2014, in 2015 was 0.86m and in 2016 1m.
2. 10 Changi South Lane, Singapore before was 2.56m in 2014, 2015 is 2.37m, in 2016 2.64m
3. 11 Changi South Street 3, Singapore was 2.3m in 2014, 2015 is 1.97m, in 2016 1.8m
4. 1 Kallang Way 2A (Xpress Print Pte Ltd was 1.05 in 2014, in 2015 was 0.91m, in 2016 0.3m

Hence assuming the worst case where the master lease is not extending (there are few Industrial REITs either having challenge to extend the master lease or convert to the multi tenancy), the gross revenue will drop before slowly stabilizing the occupancy rate if the master leases does not extend.

To note, in FY2016 AIMS AMP extended the master lease for 8 Senoko however the term is not disclosed.

Another saving grace will be 8 and 10 Tuas Avenue 20 target to be ready in 2Q 2017and can mitigate the loss of revenue due to negative rental revision, this also provided if it starts to generate income.

Majority of industrial supply will be coming in between 2016-2017. Moving forward from 2017 hopefully it will be a better year ahead for industrial REIT.

FY22 will be another milestone we will need to take a look as well as 20 gul way will have the remaining lease to expired. To note CWT is a sponsor of CACHE Logistic.

Management

The performance fee was based on DPU growth and the chairman currently holding around 7.9% of the total shares.

Dividend

The dividend has been growing from 0.1053 in year 2014 to 0.1135 in year 2016, however we will likely to see pressure on the dividend for FY17 and FY18.

Summary

I would like to add more when the market push down the price further in 2017. When the occupancy drop and more negative rental revision, moving ahead when economy recover there will be a growth potential instead of buying at the peak market rate

Post of AA Reit