• Initial NPI yield of 6.98%
• DPU accretion of 0.118 S cents
• Average lease duration extended

Acquisition of high-spec building

Ascendas REIT (A-REIT) yesterday proposed to acquire Hyflux Innovation Centre from Singapore-listed Hyflux Ltd’s subsidiary for S$170.0m. An upfront land premium of S$21.2m will be payable to JTC, thus bringing the total purchase consideration to S$191.2m. Upon completion of the acquisition (expected on 30 Jun 2014), Hyflux and Hydrochem Pte Ltd will collectively lease back ~50% of the property’s GFA for 15 years, with the other existing third-party tenants to be assigned to A-REIT. We note that the property currently has an occupancy rate of 83.9%, and includes tenants such as Hyflux, NEC, Covidien Pte Ltd, American Express and Renesas Electronics Singapore.

Details on the deal

Hyflux Innovation Centre is a 10-storey highspec building with a basement and surface car park, and is valued at S$197.0m by DTZ Debenham Tie Leung (SEA) Pte Ltd. Located within the Kallang Industrial Estate, the property is within walking distance to Boon Keng MRT station and is also easily accessible to other parts of Singapore via expressways. We understand that Hyflux will provide rental support for the remaining vacant space (16.1%) for three years. At 100% occupancy, the acquisition is expected to generate an initial NPI yield of 6.98%. According to management guidance, the new addition is estimated to add an annualised 0.118 S cents to A-REIT’s pro forma FY14 DPU, assuming the acquisition was funded by 40% debt and 60% equity.

Maintain BUY

Apart from being DPU-accretive, we note that the acquisition would improve the portfolio weighted average lease to expiry from 3.85 years to 3.96 years as well as broaden its tenant base – a move that we view positively given the overall lacklustre industrial market. We now factor in the acquisition into our forecasts and update our model assumptions. Our fair value remains intact at S$2.45. Retain BUY on A-REIT.

Source: OCBC Research - 27 Jun 2014