Industrial REIT - CGS-CIMB Research 2019-03-06: Muted Impact From Hyflux Thus Far

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) ESR-REIT (SGX:J91U)

Industrial REIT: Muted Impact From Hyflux Thus Far

Hyflux contributed 1.2% and 3.5% to rental income for Ascendas REIT and ESR-REIT, respectively.
Security deposits further cushion the muted impact on Ascendas REIT; ESR-REIT would have seen a 5.4% decline in annualised 4Q18 DPU in case of a default.
We maintain our ADD calls on Ascendas REIT and ESR-REIT pending greater clarity on the outcome of Hyflux’s restructuring.

On 5 Mar 2019, according to media reports, the Public Utilities Board in Singapore issued a default notice to Hyflux Ltd (SGX:600) subsidiary Tuaspring in relation to its financial ability to fulfill contractual obligations. Prior to this, creditors and security holders were asked to file their proofs of claims with Hyflux for its business and debt restructuring exercise.
Ascendas REIT (SGX:A17U) has exposure to Hyflux Building and Hyflux Innovation Centre while ESR-REIT (SGX:J91U)’s exposure comes from 8 Tuas South Lane.

Hyflux Building has been vacant since Jan 19 and contributed S$1.9m of rental income in FY3/18.
Hyflux currently occupies 50% of Hyflux Innovation Centre as its headquarters and has been fulfilling its rent payment obligations to Ascendas REIT. As at 31 Dec 18, the property had an occupancy of 88.6%. The asset contributed S$17.6m of rental income in FY3/18.
Ascendas REIT has a security deposit of c.S$7.6m on both assets. Hyflux accounted for 1.2% of Ascendas REIT’s monthly portfolio gross revenue as at 3QFY3/18.

The property at 8 Tuas South Lane was acquired by ESR-REIT in Dec 17 and is 70% leased to Hyflux; the remaining 30% is currently vacant. Hyflux is currently on its first year of its 15-year lease with ESR-REIT. To date, there has been no default on rental payments and ESR-REIT holds security deposits of c.S$2.1m amounting to 3 months of rental.
Hyflux is one of ESR-REIT’s top-10 tenants by rental income and income from the property accounted for 3.5% of rental income in Dec 18.

In a worst-case scenario, we assume Hyflux was unable to fulfill its rental obligations and the REITs were unable to lease out the space in the most recent FY. We also assume that the full amount of the security deposit was drawn down for rental.
For Ascendas REIT, we further assume 50% revenue exposure for Hyflux Innovation Centre. We estimate that the c.S$7.6m security deposit would cover c.8.5 months of rental income for both Ascendas REIT assets. On a pro-forma basis, we estimate that the impact to FY3/18 revenue would have been less than 1%.
With the above scenario, ESR-REIT disclosed that there would have been a 5.4% drop in annualised 4Q2018 DPU.

Due to the current non-default of rental payments, we have not factored any impact into our numbers and maintain our forecasts pending greater clarity on the outcome of Hyflux’s restructuring.
Key downside risks would be a default on rental and an inability to backfill vacancies, resulting in earnings downside and valuation risk.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-06

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