Industrial REITs - DBS Research 2016-07-12: Remain or Exit

Industrial REIT MAPLETREE INDUSTRIAL TRUST ME8U.SI FRASERS COMMERCIAL TRUST ND8U.SI ASCENDAS REAL ESTATE INV TRUST A17U.SI

Industrial REITs - Remain or Exit

New Hewlett Packard (HP) building to rock the industrial market; MINT will be the prime beneficiary.
Downside risk from FCOT if HP vacates but opportunity to embark on an AEI will be a positive.
Boost to MINT but this is likely to be priced in.
Maintain BUY on FCOT (S$1.49) and AREIT (S$2.55)

The latest built-to-suit (BTS) property along 1160 & 1200 Depot Road anchored by Hewlett Packard (HP) is expected to be a major industry shaker when it completes in end-2016/1H17. With a total GFA of close to 824,500 sqft, the new building represents one of the largest industrial leasing deals in recent times. HP currently occupies an estimated 2.3m sqft of space across three main locations in Singapore,
1. Alexandra Technopark,
2. Tuas, and
3. Depot Road.
Committing close to 20 years for the new building, we believe that HP is likely to consolidate part of its operations in Singapore to the new property in order to improve operational efficiency and optimise its real estate footprint in Singapore.
While it is still not clear which existing buildings that HP will vacate from, we believe that properties nearest to the new integrated facility at Depot Road might be at risk of non-renewal. Certain properties located near the new integrated facility include properties owned by AREIT (<1% of GRI), FCOT (17% of GRI) and United Engineers’ (UE).

The contribution from new HP facility (c.9% of FY19F top-line) will be timely just when the REIT is expected to face downside pressures to income given the weak industrial outlook.
Completed in two phases, we expect an 8% jump in FY19F DPU (March year end) once the full contribution from HP kicks in. The initial contribution starts from 1QFY18F.
Nevertheless, given the recent share price rally, we believe the boost from HP has largely been priced in and recommend investors look to re-enter on a pull back.
TP is raised to S$1.81 on roll-forward valuations.

Being an anchor tenant at Alexandra Technopark (ATP), we estimate that HP forms c.17% of FCOT’s income.
While a scenario of non-renewal of partial/all HP lease at ATP at end- Sep/Nov 17, could potentially result in a 20% downside to our FY18F DPU, it will allow the REIT to undertake an asset enhancement initiative (AEI) to help close the 10-30% discount in rents to properties near ATP.
Assuming an AEI, our base case of HP partially moving out of ATP and a tweak in the proportion of management fee units, FCOT should be able to maintain a flattish DPU profile but still offer an attractive forward yield of 7.4-7.6% which is above its mean yield of 7%.
We believe fears over the loss of HP are overblown priced in.
We reiterate our BUY call with a revised TP of S$1.49.

The contribution from HP building is <1% of topline and impact marginal. We believe that the lease is likely to be renewed given its location within the new Depot Road cluster.

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-07-12

CIMB Securities SGX Stock Analyst Report BUY Maintain BUY 2.55 up 2.50

BUY Maintain BUY 1.49 Up 1.47

HOLD Downgrade BUY 1.81 Up 1.64