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Maximisation of GFA at 20 Gul Way. AAREIT announced the redevelopment of 20 Gul Way, and intends to build a five-storey ramp-up warehouse with total GFA of c.1.16m sqf, three times the GFA at the current property. The redevelopment will be conducted in two phases, and is expected to complete by Dec 2013. Upon completion, it will be master leased to CWT at market rate with annual rental escalation of 2% p.a. CWT will also be subscribing to up to SGD2.5m of new units in AAREIT via a private placement.
Yield on cost of c.8%, 10% accretion to FY14E DPU. The redevelopment will be financed by debt. Post the redevelopment, AAREIT’s gearing will be c.42%. AAREIT was able to secure SGD150m of debt at a 204bps above 3Y SOR, a more attractive rate than its previous cost of debt of c.3.4%. We think the redevelopment is positive for AAREIT, and will help to significantly improve the REIT’s earnings in the long-term. We upgrade our price target by +13% to SGD0.26/unit. In our view, AAREIT could potentially explore redevelopment opportunities at a number of its other properties which similarly have underutilised plot ratios.
1Q12 DPU of 0.53Scts in-line with our estimates, 6% above consensus. Gross revenue stayed relatively flat q/q. Occupancy continued to improve, reaching 99.1% at the end-Jun 2011 vs 96% in Mar 2010. Gearing increased to 32% with healthy interest coverage of 6.4x.
Reiterate OUTPERFORM, PT: SGD0.26/unit. Our DDM-derived price target assumes risk-free rate of 3.5%, 1.3x beta and terminal growth of 0.5%. AAREIT is now trading at 0.8x P/B and FY11E DPU yield of 9%. At our price target, it would be trading at book value and 8% DPU yield.
Please see attached note for further details.
