Singapore Industry Focus Industrial REITs Industry Focus Industrial REITs Page 2 Hewlett Packard (HP)

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  • ed-CK / sa: JC

    Remain or Exit  New Hewlett Packard (HP) building to rock the industrial

    market; MINT will be the prime beneficiary

     Downside risk from FCOT if HP vacates but opportunity to embark on an AEI will be a positive

     Boost to MINT but this is likely to be priced in

     Maintain BUY on FCOT (S$1.49) and AREIT (S$2.55) HP rocks the industrial market. The latest built-to-suit (BTS) property along 1160 & 1200 Depot Road anchored by Hewlett Packard (HP) is expected to be a major industry shaker when it completes in end-2016/1H17. With a total GFA of close to 824,500 sqft, the new building represents one of the largest industrial leasing deals in recent times. HP currently occupies an estimated 2.3m sqft of space across three main locations in Singapore, (1) Alexandra Technopark, (2) Tuas, and (3) Depot Road. Committing close to 20 years for the new building, we believe that HP is likely to consolidate part of its operations in Singapore to the new property in order to improve operational efficiency and optimise its real estate footprint in Singapore. While it is still not clear which existing buildings that HP will vacate from, we believe that properties nearest to the new integrated facility at Depot Road might be at risk of non-renewal. Certain properties located near the new integrated facility include properties owned by AREIT (

  • Industry Focus

    Industrial REITs

    Page 2

    Hewlett Packard (HP) new hi-tech building in Depot Road to rock the Industrial scene HP currently located in three main locations in Singapore. The latest built-to-suit (BTS) property along 1160 & 1200 Depot Road built by MINT and anchored by Hewlett Packard (HP) is expected to be a major industry shaker when it completes in end-2016/1H17. With a total GFA of close to 824,500, the new building represents one of the largest industrial leasing deals in recent times. Based on press reports and HP’s website, HP Inc and HP Enterprise are located across three main locations in Singapore. The group currently occupies an estimated 2.3m sqft of space across three main locations in Singapore, (1) Alexandra Technopark, (2) Tuas, and (3) Depot Road. Unclear whether new facilities being built by MINT to consolidate operations or for expansion plans. At this stage, it is unclear whether the new facilities at 1160 & 1200 Depot Road were intended to be used to help consolidate HP operations that are spread across Singapore or to cater for HP

    demerger’s expansion plans. In addition, MINT has not disclosed the exact specifications for the new facilities or whether HP will do any light assembly/manufacturing. The two buildings are expected to be completed in two phases over 2H16 and 1H17. However, given the close to 20-year lease commitment (initial lease term of 10.5 years with two five-year options) by HP before its demerger into two entities HP Inc (printers, personal computers) and HP Enterprise (servers, storage, services) on the new building, we believe that some form of space optimisation is likely. REITS that may be impacted by potential changes in HP’s leasing requirements include AREIT (

  • Industry Focus

    Industrial REITs

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    Locations of HP in various locations in Singapore (not to scale) Alexandra TechnoPark cluster

    Tuas cluster

    Depot Road cluster

    Locations in Singapore

    Source: Onemap.sg, streetdirectory.com, DBS Bank

    New HP building under construction

    3 Tuas Link 4 & 4 Tuas West Avenue

    138 Depot Road & 1150 Depot Road

    Alexandra Technopark

    Tuas Cluster

    Depot Road Cluster

    450 & 452 Alexandra Road

    Alexandra Cluster

    Page 3

  • Industry Focus

    Industrial REITs

    Page 4

    Impact on Frasers Commercial Trust (FCOT) Concerns over expiry of HP leases at Alexandra Technopark. Investors have been concerned over the expiry of the HP Inc and HP Enterprise leases at Alexandra Technopark at end- Sep/Nov-17 which combined represent c.17.2% of FCOT’s group gross rental income. These concerns have risen over fears that the two HP entities would move to the two build-to- suit Hi-Tech buildings with total GFA of 76,599 sqm (GFA) at 1160 & 1200 Depot Road which Mapletree Industrial Trust (MINT) is in the process of constructing. Probability of HP Enterprise moving out of Alexandra Technopark most likely in our view. While we are not privy to the exact lease terms for the various properties HP is located in, we believe the most likely scenario would be for HP Enterprise to consolidate its operations at the new facility built by HP Enterprise. This is due to the following factors: 1. HP sold its properties (450 Alexandra Road and 453

    Alexandra Road) to United Engineers in 2013 on a sale and lease back arrangement. The lease at 450 & 453 Alexandra Road (mainly occupied by HP Enterprise) is up for renewal 2017/2018, close to when the construction of 1160 & 1200 Depot Road is completed.

    2. If a part of HP Enterprise were to move from 450 Alexandra Road, it may be more efficient for HP Enterprise at Alexandra Technopark to also relocate to 1160 & 1200 Depot Road

    3. Based on press reports, HP invested in new facilities for its printing business at its Tuas property recently, so we believe there may less incentive to relocate HP Inc’s operations to 1160 & 1200 Depot Road.

    Detailed in the table overleaf are other potential scenarios, our thoughts on the probability of such scenarios occurring and potential impact on FCOT’s DPU. But Alexandra Technopark’s favourable location should aid the sourcing of replacement tenant. While FCOT in our view would take a short-term hit should HP Inc or HP Enterprise move out, we believe the likelihood of FCOT finding a replacement tenant is high. This is due the proximity of the property to the CBD (10-20 minutes’ drive) and affordable rents (mid-S$3 to mid- S$4 psf) in comparison to the nearby Mapletree Business City (c.S$6) and CBD (Grade A of S$9.90). In addition, we understand there have been prospective tenants who have wanted to base themselves at Alexandra Technopark but FCOT has not been able to cater to these potential tenants due to the lack of available space. Thus, we believe any vacated space would be filled up within a year without any significant incentives given by FCOT.

    Alexandra Technopark

    Source: Company, DBS Bank A potential blessing in disguise. Should HP Inc or HP Enterprise move out of Alexandra Technopark, this may be a potential blessing in disguise as it may provide FCOT the opportunity to undertake an AEI following which it can help close the rental gap to Mapletree Business City. Based on our assumption that passing rents at Alexandra Technopark will average in the low S$4 per sqft range in FY18 and FCOT intends to increase rents by 10% to mid S$4 per sqft level post AEI, we estimate FCOT could spend around S$25m based on a 10% IRR. Potential cut in DPU largely priced in. Currently, FCOT’s forward yield is elevated ranging from mid to high 7% level and close to +1SD. We believe this is reflective of investors anticipating a potential cut in DPU should HP Inc and HP Enterprise vacate from Alexendra Technopark. However, we believe a large proportion of this risk has been priced in as under our base case scenario of HP Enterprise moving out, the cut in our DPU estimates will still result in a 6.8% yield which is close to FCOT’s mean yield of 7% since 2010. Under our new earnings estimates for FCOT which assumes (1) HP Enterprise moving out, (2) FCOT conducting an AEI and (3) adjustment of the percentage of management fees in units from around one third to 100, FCOT will offer an attractive forward yield of 7.3- 7.5%. Historical yield chart since 2010

    Source: Thomson Reuters, DBS Bank

    4.0%

    5.0%

    6.0%

    7.0%

    8.0%

    9.0%

    10.0%

    2010 2011 2012 2013 2014 2015 2016

    FCOT Yield Mean -1 SD

    +1 SD -2 SD +2 SD

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    Industrial REITs

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    Scenarios potentially under consideration

    No. Scenario Rationale Proportion of NLA taken up at 1160 & 1200 Depot Road

    Likelihood

    1 HP Inc and HP Enterprise both move from Alexandra Technopark to 1160 & 1200 Depot Road

    Move to newer facilities with comparable rent

    510,825 sqft out of 700,825 sqft

    Moderate

    2 HP Inc and HP Enterprise both stay at Alexandra Technopark with operations from Tuas Cluster moving to 1160 & 1200 Depot Road

    Consolidates all operations nearby. Alexandra Technopark and Depot Road properties are within three to five minutes drive of each other

    381,688 sqft out of 700,825 sqft

    Low/Moderate as according to press reports HP recently expanded its Indigo Ink Manufacturing facility at Tuas

    3 HP Enterprise stays at Alexandra Technopark. HP Inc at Alexandra Technopark and operations from Tuas Cluster move to 1160 & 1200 Depot Road

    Consolidates all of HP Inc’s operations at Depot Road. According to press reports properties at Tuas Cluster mainly relate to HP’s Indigo Ink manufacturing operations

    700,666 sqft out of 700,825 sqft

    Moderate as according to press reports HP recently expanded its Indigo Ink Manufacturing facility at Tuas