AIMS APAC REIT focuses on AEIs to drive DPU, announces modest acquisition

Last June, AA REIT started on asset enhancement initiatives (AEIs) for NorthTech, costing $13 million. The capex involved upgrading and increasing the power supply, installing new chillers so that the building is energy-efficient, sprucing up lobby areas and adding end-of-trip facilities such as showers for cyclists.

“It is part of our tenant retention strategy. We have to continually upgrade and improve our buildings to retain tenants,” Koh says. NorthTech comprises 450,000 sq ft of gross floor area (GFA). “The property is 20 years old. We have to future-proof the asset. This is especially important in times of downturns where tenants have a choice. So, it makes sense to upgrade the building, making it investment-grade,” he adds.

During a recent property tour of four of AA REIT’s properties, it is clear that two of the properties are plugged into Singapore’s Future Economy theme and URA’s plans for Woodlands Regional Centre, first introduced in Master Plan 2014.

After NorthTech, the second property on the tour was the Beyonics building. Here, security and secrecy were so tight that visitors could only gaze at the building from across the road. “Beyonics was our first build-to-suit project. We acquired an empty piece of land and built the company’s headquarters,” Koh says.

Beyonics was listed on the Singapore Exchange but merged with Chosen Holdings in 2016 and is no longer listed. It used to manufacture precision-engineered components, but has moved up the value chain to provide an integrated range of design, production, engineering and fulfilment solutions to its clients as well.

Land lease top-up

AA REIT acquired the land for the Beyonics building from Seiko Instruments Singapore for $7.125 million in 2016. The construction cost, land lease extension and other fees took total cost to $39 million. The net property income yield on development cost was 8.9%. The lease to Beyonics is for 10 years, with annual rental escalations.

“When we agreed on the Beyonics transaction, the land was left with 16 years of land lease, but we topped it up to 30 years. As long as the master plan doesn’t change and you propose a business case, you can extend the land lease,” Koh explains. Asked about the cost of land premium, he says: “We topped up 14 years, so that the land tenure is 30 years. JTC has published rates for land rates and land premium, taking into consideration the location and business use of land, whether B1 or B2. It’s a fixed rate.

“A lot of our properties were acquired under the old scheme, with land leases of 30 years + 30 years. So, most of our properties have more than 40 years’ land tenure left.

“When you are left with 10 to 15 years, you must kick-start the negotiation process. So, it is important for us to pick locations such as Tuas and Marsiling, which are core industrial locations and where the chances of zoning being changed is low. The government has said that it wants part of the economy to remain industrial to support the new economy.”

Next on the visit was 3 Tuas Avenue 2, which is under development. Unlike Beyonics, 3 Tuas Avenue 2 is a speculative build. The property had a single tenant, which vacated. Instead of leaving the property empty, AA REIT’s manager decided to rebuild it as a ramp-up logistics warehouse. Much like 20 Gul Way — the REIT’s largest property by size — the ramp is in the middle of the property, serving all the floors and within easy access of the entire floor plate. In this way, the ramp serves all the floors as though they are ground floors.

The last property — and the largest — on the tour was 20 Gul Way. At one point, its anchor tenant was CWT, a unit of CWT International. On April 16, CWT International failed to pay accrued interests and certain fees to its lenders, causing a default. CWT is a tenant of 20 Gul Way and 30 Tuas West Road, and contributed 8.8% to gross rental income (GRI) in 4QFY2019 ended March 31.

According to AA REIT’s FY2019 results announcement, exposure to CWT leases will be further reduced because of the expiries of CWT lease agreements, with the final CWT lease agreement expiring in July 2021 (FY2022). At least 5.2% of AA REIT’s gross rental income will expire progressively from FY2020 (the current FY). “We continue to monitor the situation. We have started marketing 20 Gul Way to bring in new tenants,” Koh says.

In any case, 20 Gul Way originally comprised 10 single-storey buildings valued at $41.8 million, contributing GRI of $5.4 million a year. The property was valued at $232 million as at March 31 and contributed $20.9 million to GRI in FY2018.

20 Gul Way was developed in four phases: 1, 2, 2E and 3. “Each phase had two [master] leases with CWT and, over the next two years, these [leases] will expire in a very orderly fashion,” Koh confirms. Already, some of the leases have been converted into multi-tenancy leases.

All in, AA REIT owns 26 industrial properties, all of which are located in Singapore except for a business park property, in which the REIT has a 49% stake — Optus Centre in Macquarie Park, New South Wales. The anchor tenant Optus is also AA REIT’s largest tenant by GRI.

Modest Australian acquisition

On May 15, AA REIT announced plans to acquire the Asia-Pacific headquarters of Boardriders, located in the southern Gold Coast suburb of Burleigh Heads, for A$41.5 million ($39.6 million), including fees and expenses. The vendor is GSM Rocket Australia, a unit of Boardriders, which designs, produces and distributes branded ready-to-wear apparel, footwear and accessories under brands such as Quiksilver, Billabong, Roxy, DC Shoes, RVCA and Element. Boardriders will rent the property for an initial lease term of 12 years. It is a triple net lease, in which the first-year rental is A$3 million.

According to AA REIT’s announcement, the “headline” net profit income yield is 7.8%. The acquisition is distribution per unit- and yield-accretive. DPU for FY2019 was 10.25 cents and pro forma DPU, assuming the acquisition was completed on March 31, would have been 10.33 cents. The freehold Burleigh Heads property is expected to lengthen the portfolio’s weighted average lease to expiry, and land tenure.

The purchase is expected to be predominantly funded from Australian dollar debt facilities to maintain a natural currency hedge on the acquisition. AA REIT’s aggregate leverage following the acquisition will increase from 33.7% as at March 31 to 35.5% on a pro forma basis if the acquisition is debt-funded.

Separately, on March 28, sponsor AIMS Financial Group acquired the 50% stake in AA REIT’s manager that it did not own for $9 million, and a 10.26% stake in the REIT from AMP Capital. AIMS now holds more than 18% of AA REIT.

Although AA REIT’s FY2019’s DPU eased marginally to 10.25 cents, 4QFY2019’s DPU rose 10% to 2.75 cents, giving a forward annualised DPU of 11 cents, and a forward yield of 7.9%. As at March 31, the portfolio (excluding the Burleigh Heads acquisition) was valued at $1.458 billion.

In 2009, AA REIT, then known as the troubled MacarthurCook Industrial REIT, had to be recapitalised with the help of AIMS Financial Group, which had acquired MacarthurCook in Australia.

George Wang, chairman of AA REIT’s manager and AIMS and now the REIT’s largest unitholder, is cognisant of the negative aspect of REITs acquiring assets to raise assets under management just to increase fee income for its sponsors. In a meeting with The Edge Singapore last year, Wang said his REIT could not keep buying properties. Property is about quality and location, and AIMS — as a property manager — continues to view many deals in Australia. Still, Wang had articulated that the best way to raise the REIT’s valuation and cash flow was through redevelopment.

“In terms of strategy for the REIT, it has remained the same,” Koh confirms. He has identified a further seven properties in Singa­pore with unutilised GFA of 502,707 sq ft, leaving AA REIT with plenty of room for organic growth through AEIs.