Hyflux enters sale and lease-back deal for global HQ

BARELY two years since Hyflux unveiled its new global headquarters in July 2012, the water specialist yesterday said that it will sell Hyflux Innovation Centre to Ascendas Real Estate Investment Trust (A-Reit) for $170 million in cash and lease it back for 15 years in a move to unlock capital to fund growth.

The sale and lease-back deal - entered with HSBC Institutional Trust Services (Singapore) Limited in its capacity as A-Reit's trustee - will reap a divestment gain of $84 million for Hyflux, which retains the naming rights for the property as its largest tenant.

Hyflux will lease back 50 per cent of the gross floor area of 43,434 sq m for 15 years. All third-party tenants - which include NEC and American Express - will be assigned to A-Reit. The 10-

storey building at Kallang Industrial Estate will have an occupancy rate of 83.9 per cent. Hyflux will provide rental support for the remaining vacant space for three years.

Hyflux plans to use the proceeds to buy new technology and investments in research and development; expand and automate its membrane manufacturing operations in Tuas Hub; and fund its infrastructure project tenders.

"The sale and lease-back transaction is part of our capital recycling strategy to enhance the efficiency of our balance sheet and to redeploy capital for strategic investments. Hyflux Innovation Centre will continue to be the nerve centre of our global operations, and we intend to remain at Hyflux Innovation Centre for the long term," Hyflux executive chairman and group CEO, Olivia Lum, said.

Buyer A-Reit will pay JTC an upfront land premium of $21.2 million for the remaining land lease of the first 30-year term on the assignment of the land lease. The property is a JTC estate, with lease expiring in December 2068.

A-Reit expects the purchase to generate a net property income yield of about 6.98 per cent, post acquisition costs, in the first year. The annualised pro-forma financial effect of the acquisition on distribution per unit would be around 0.118 cent per unit for the financial year ended March 31, 2014, assuming that A-Reit had bought and operated the property for the whole of fiscal 2014. It also assumes that the purchase was funded by 60 per cent equity and 40 per cent debt.

An A-Reit spokesman told BT that the acquisition will be funded by existing debt facilities and will push A-Reit's gearing up 1.5 percentage points to 31.5 per cent.

The property, sitting on a 17,374 sq m site, was earlier valued at $197 million, inclusive of land premium payable, by DTZ Debenham Tie Leung (SEA) Pte Ltd.

Following the purchase, A-Reit's weighted average lease term to expiry is expected to increase from 3.85 years to 3.96 years. Analysts are comfortable with A-Reit's acquisition and gearing as it solidifies its position within the industrial Reit space. It will own a total of 103 properties in Singapore and two business park properties in China. A-Reit was trading around $2.30 a share yesterday.

The sale is Hyflux's second divestment in recent months. It had sold its 49 per cent interest in Marmon Hyflux Investments Pte Ltd for about $8.5 million in March.

Analysts say that the $84 million divestment gain will significantly boost Hyflux's bottom line, and add nine cents to Hyflux's share price valuation. Hyflux was trading around $1.20 a share yesterday.

But they warn that Hyflux's core operations remain weak this year due to a lack of projects and new wins. Without disposal gains, analysts say that Hyflux may incur a net loss of about $5 million.