SINGAPORE (Mar 7): CGS-CIMB Securities is maintaining Ascendas REIT (AREIT) and ESR REIT (EREIT) at “add” despite Hyflux’s debt-restructuring woes.
This was after the Public Utilities Board on Tuesday issued a default notice to Hyflux subsidiary Tuaspring reminding the water company it has to fulfil its contractual obligations.
Prior to the notice, creditors and security holders were asked to file their proofs of claims with Hyflux for its business and debt restructuring exercise.
See: Hyflux restructuring plans rocked by PUB notice to Tuaspring; ESR-REIT files proofs of claim
Ascendas REIT has exposure to Hyflux Building and Hyflux Innovation Centre while ESR REIT (EREIT) has exposure to 8 Tuas South Lane.
In a Wednesday report, Lock says the Hyflux Building has been vacant since January and contributed $1.9 million of rental income in FY18.
As for the innovation centre, Hyflux currently occupies 50% of the property as its headquarters and has been fulfilling its rent payment obligations to A-REIT.
As at Dec 31 2018, Hyflux Innovation Centre had an occupancy rate of 88.6% and contributed $17.6 million of rental income in FY18.
In addition, AREIT has a security deposit of $7.6 million on both assets. For 3Q18, Hyflux accounted for 1.2% of AREIT’s monthly portfolio gross revenue.
Meanwhile, Hyflux is still paying EREIT for 8 Tuas South Lane.
The property was acquired by EREIT in Dec 2017 and was 70% leased to Hyflux with 30% left vacant. Hyflux is currently on its first year of its 15-year lease with EREIT.
To date, there has been no default on rental payments and EREIT holds a security deposit of $2.1 million amounting to three months of rental.
Hyflux is also one of EREIT’s top-10 tenants by rental income with income from the property accounting for 3.5% of rental income in Dec 18.
In the worst case scenario, Lock says Hyflux would be unable to fulfil its rental obligations while the REITs would be unable to lease out the space in the most recent FY with the full amount of security deposit drawn down for rental.
“For AREIT, we further assume 50% revenue exposure for Hyflux Innovation Centre. We estimate that the $7.6 million security deposit would cover 8.5 months of rental income for both AREIT assets. On a pro-forma basis, we estimate that the impact to FY3/18 revenue would have been less than 1%,” says Lock.
On the contrary, EREIT would have suffered a 5.4% drop in annualised 4Q18 DPU in its worst case scenario.
As for now though, CGS-CIMB lead analyst Lock Mun Yee has not factored any impact into its numbers pending greater clarity on the outcome of Hyflux’s restructuring.
“Maintain our calls on AREIT and EREIT with target prices of $2.83 and 62 cents respectively,” says Lock.
As at 12.58pm, units in AREIT and EREIT are trading at $2.83 and 53 cents or 16.5 and 14.3 times FY20F earnings respectively.
