The Edge Singapore – 30 April 2012
By Goola Warden 

It's been almost 2.5 years since George Wang stepped into save Singapore-listed MacarthurCook Industrial REIT in a somewhat controversial rescue plan that diluted minority shareholders.

Now, after a two-year stint as chairman of what has become AIMS AMP Capital Industrial REIT (AA REIT), Wang is stepping aside and handing over that role to Andrew Bird, a representative from AMP Capital. That's because of an arrangement where the chairmanship, a largely non-executive role, rotates between AIMS and AMP every two years.

For Wang, the changeover marks the end of a period of consolidation for AA REIT. In 2009, AA REIT had a debt-to-asset ratio of 44% and was struggling to refinance its largely short term borrowings. On top of that, it had committed to buying a building at a lofty price. And, the market value of its units had crashed, making it tough to raise equity. In November 2009, Wang managed to win approval for his recapitalisation plan at an acrimonious EGM.

"The vote for the recapitalisation was close," Wang says, laughing at the tension everyone felt during the meeting. Since then, shares in AA REIT have been recovering. "I am glad the units now trade at a smaller discount of 13 %," he notes. "The unit price has been rising." AA REIT's unit price is up 26% this year compared with the 13.4% gain in the FISE Index.

Nick McGrath, CBO of the REIT's manager, attributes this to the restructuring of the REIT, which has been well executed. "We've done our level best to get the capital structure right. We've had 10 consecutive quarters of aggregate leverage [net debt-to-asset ratio] at 30%." Meanwhile, the REIT has also been distributing a stable and growing distribution per unit (DPO), McGrath adds. "I think the market feels it can trust this REIT."

Unlocking value
AA REIT is also getting a lift from the redevelopment of 20 Gul Way, a property that once consisted of single-storey buildings built to a plot ratio of 0.4 times. The allotted plot ratio for the land is 1.4 times, McGrath says. "This means there is a free development capability of a plot ratio of one time." The property was acquired for $41.8 million and has a site area of around 828,000 sq ft.

"We've knocked down all the buildings and what we're doing is a five-storey ramp-up warehouse in partnership with CWT," McGrath says, describing the redevelopment. The contractor for the project is Indeco Engineers, a unit of CWT, and the total development cost is $155 million. When completed, 20 Gul Way will be master-leased to CWT.

Based on pro forma figures, 20 Gul Way would be valued at some $240 million if the redevelopment had been completed on March 31 (the trust has a March year-end). The total appraised value of AA REIT's 25 properties (excluding Gul Way) as at March 31 was $930.9 million. So, AA REIT's portfolio value could well top $1 billion when 20 Gul Way's redevelopment is Completed. AA REIT's currently has a market cap of $528 million.

The first phase of the redevelopment is due to be completed by year-end. The second phase will be completed next year. Before redevelopment, Gul Way contributed just $3.6 million to annual rental income. That contribution will balloon to $16.3 million once both phases are completed. "The full impact will be felt through the course of 2014," McGrath says, adding that the property will account for 20% of the trust's portfolio. The yield on cost of the redevelopment is estimated at 8.1%, while the unlevered internal rate of return is 10%, he adds.

That should give AA REIT's DPU a nice lift. "If we don't do any other acquisition, and if we don't do any development, the 20 Gul Way redevelopment will grow our DPU by 15%," McGrath says. "The impact of Gul Way is 1.46 cents." As at March 31, the REIT announced a DPU of 2.7 cents for the January to March quarter, taking full-year DPU to 10.45 cents, up 24.5% y-o-y.

Emboldened by his first redevelopment, McGrath has looked through his portfolio for further asset enhancement initiatives (AEIs) and redevelopment opportunities. "Our strategy is to continue to look for further opportunities to unlock value within the portfolio. We don't really need to go outside the portfolio to enhance the quality and increase the size of the portfolio," he says.

In fact, he reckons that at least half of the 26 properties in the REIT were built well below their full allocated plot ratios. "There's nothing as attractive as the 20 Gul Way transaction -- that's unique," he says. "But there are opportunities to enhance or redevelop some properties."

In 2010, as part of the recapitalisation, AA REIT acquired five properties from sponsor and shareholder AMP Capital. It subsequently sold three properties, two of which were in Singapore and one in Japan, raising some $60 million. As at March 31, the portfolio was revalued up by 3.8%, raising net asset value to $1.41 from $1.37.    

On April 16, Standard & Poor's upgraded AA PEIT to investment grade. "The rating on AA REIT reflects the trust's portfolio of good-quality and well-located industrial-property assets. The rating also reflects the REIT’s operating strategy, which benefits from an association with the REIT’s sponsors AMP Capital Group and AIMS Financial Group, and the trust’s moderate financial policy,” S&P says in a statement.

However, the ratings agency also pointed out that the trust could experience some volatility when some master leases expire this year as well as next year, when 42% of leases are up for renewal.

AA REIT’s incoming chairman Bird figures lease renewal could e positive for the trust.

“We are leasing 900,000 sq ft [this year], and we have increased the rent by 10% to 15%.  We are going to see distribution grow and valuations of the properties increase. Maximising rental growth is very important,” he adds.

CEO McGrath agrees, “In the last 12 months, as more of the master-lease properties come off their master lease, the opportunity is there to re-lease that space out at market rate.”

The second-largest asset in the REIT – 8 & 10 Pandan Crescent – was re-leased at rents that were more than 10% higher recently. Now, McGrath says he sees similar potential with 27 Penjuru Lane, which comes off the master lease in December. Rental for warehouse-cum-logistics assets are going at $1.50 to $1.60 psf per month, McGrath says, compared with $1.20 psf per month after the global financial crisis struck.

All that is putting AA REIT back in the spotlight with analysts. Notably, Macquarie Research and Standard Chartered Bank have started to cover it. Macquarie forecasts a DPU of 10.7 cents for FY2013 and 11.3 cents for FY2014, giving forward yields of 9% and 9.5%, respectively.

 AA REIT Focuses on Asset Enhancement and Redevelopment to lift DPU and Drive Value.pdf