Ascendas REIT and ESR-REIT could suffer short-term pains from Hyflux troubles

The two REITs have exposure to three properties where Hyflux operates.

Hyflux’s default troubles with the Public Utilities Board (PUB) could spark some short-term pains for Ascendas REIT, which is exposed to Hyflux Building and Hyflux Innovation Centre, and ESR-REIT, which is exposed to 8 Tuas South Lane, CGS-CIMB said in a report.

ESR-REIT has already filed proofs of claim against Hyflux on 6 March. 100% of the REIT’s 8 Tuas South Lane property is leased to Hyflux with the water treatment firm currently on the first year of its 15-year lease with ESR-REIT.

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 December 2018.

Assuming a worst-case scenario wherein Hyflux is unable to fulfil its rental obligations, the REITs are unable to lease out space in the most recent financial year, and the full amount of the security deposit was drawn down for rental, ESR-REIT would suffer a 5.4% drop in annualised Q4 2018 distribution per unit.

Meanwhile, Hyflux’s troubles are expected to have a muted impact on Ascendas REIT. The REIT has Hyflux Building vacant since January 2019. The building contributed $1.9m of rental income as of 2018.

Hyflux currently occupies 50% of Hyflux Innovation Centre as its headquarters and has been fulfilling its rent payment obligations to Ascendas REIT. As of 31 December 2018, the property had an occupancy of 88.6%. The asset contributed $17.6m of rental income.

Ascendas REIT has a security deposit of $7.6m on both assets. Hyflux accounted for 1.2% of Ascendas REIT’s monthly portfolio gross revenue.

CGS-CIMB analyst Lock Mun Yee commented, “We further assume 50% revenue exposure for Hyflux Innovation Centre. We estimate that the c.$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%.”

“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 concluded.