Ascendas REIT

Kim Eng on 26 June 2014

• Paying SGD191.2m (SGD507 psf), including an upfront land premium of SGD21.2m. 
• Hyflux will provide rental support for vacant space for the initial three years.
• Accretion to DPU is negligible. Reiterate BUY with an unchanged TP of SGD2.65.

Acquisition that comes with rental support
Ascendas REIT (AREIT) has just announced the proposed acquisition of Hyflux Innovation Centre for a total price of SGD191.2m (SGD507 psf), including an upfront land premium of SGD21.2m for the remaining 28.8 years land tenure. The transaction is expected to complete by month end. Hyflux will leaseback 50% of the GFA for 15 years and all existing third-party tenants (NEC, Covidien, American Express and Renesas Electronics Singapore) will be assigned to AREIT. As the largest tenant, Hyflux will retain naming rights for the property. The building has an existing occupancy rate of 83.9%. Hyflux will provide rental support for vacant space for the initial three years. Hyflux has stated that the capital gain for its HQ divestment, including rental support, is SGD84m.

Provides a negligible uplift to DPU
With 100% occupancy, the acquisition is expected to generate an NPI yield of 6.98% in the first year which is higher than AREIT’s 6.3% average NPI yield for FY3/14. We forecast an initial average passing rent of SGD3.84 psf/month (including rental support) and assume the acquisition to be fully debt-funded. This will raise A-REIT’s gearing from 30% as of 31 Mar to 31.5%. The acquisition is marginally yield-accretive. Reiterate BUY with an unchanged DDM-derived TP of SGD2.65 (cost of equity = 7%, Tg = 1%).