Viva Industrial Trust: Initiation Report

Business Model of Viva Industrial Trust (‘VIT’)

Viva Industrial Trust Singapore is a business-park focussed REIT listed on the SGX since November 2013. It manages a portfolio of 9 properties (2 Integrated Business Parks, 3 Warehouses and 4 Light Industrial Factories) in Singapore.  It collects rent from the tenants and after netting operating expenses, the rents are then paid out to unitholders as dividends. As a REIT operating in the industrial sector, it is very much tethered to the manufacturing sector of Singapore.

Investment Merits of Viva Industrial Trust

1. Business-Park Focused REIT

Viva Industrial REIT has the highest concentration of Business Parks among the REITs listed on SGX. Indeed, it represents 54.2% of Viva Industrial REIT’s Asset Under Management (‘AUM’) and thus forms the core of its portfolio.  Business Park is the only sub-sector that faces the least headwinds within the industrial sector. According to JTC’s latest report, rents for business parks in 4Q2016 have risen 1.2% quarter on quarter and 0.5% year-on-year. Furthermore, from now till 2019, only 29,000 sm of new supply, or equivalent to 1.4% of existing completed stock, is expected to come on stream. Such tight supply will help to absorb the existing vacancy and compress rents higher in this sub-sector.

2.Diversified and Quality Tenant Base

Viva Industrial Trust has a diversified tenant base made up of more than 100 tenants. Quality-wise, the bulk of its income is contributed by reputable Multi-National Companies (‘MNCs’) such as Cisco, Meiban and Johnson Controls. Most importantly, its exposure to the troubled Oil & Gas sector is less than 1%. One only need to look as far as what happened to Soilbuild REIT when Technics Oil & Gas defaulted on its payment.

3.High Dividend Yield

Let’s be honest. It was the eye-popping dividend yield that stirred Heartland Boy to analyse Viva Industrial Trust further. Currently, Viva Industrial Trust provides a trailing 12-month dividend yield of 9.1% based on Heartland Boy’s purchase price of $0.765. It experienced a dip in Distribution Per Unit (‘DPU’) in 2016 as it undertook a private placement in November 2016 for the acquisition of Chin Bee Avenue that was only completed in January 2017.

Despite the slight dip in 2016, Viva Industrial REIT is still the highest yielding industrial REIT on SGX at the moment. Note that the average yield for industrial S-REITS is only ~7.8%. Perhaps, the share price remains depressed due to its association with the plagued industrial sector. However, slight capital appreciation may be expected if this gap is ever narrowed. It is therefore a very attractive candidate for Heartland Girl’s portfolio as it consists mainly of high dividend stocks.

Nonetheless, Heartland Boy is also certain that many readers will ask if this DPU can be sustained? As shown below, it is possible to look at some indicators to give us a glimpse into the future performances of Viva Industrial Trust.

Indicator 1: New Revenue From Asset Enhancement Initiative

As mentioned in its previous annual report, the Manager undertook a major Asset Enhancement Initiative (‘AEI’) for Viva Business Park by converting surface carpark and underutilized areas into commercial space. It is finally able to reap what it has sowed since May 2015 when Phase 3 of the AEI is completed in February 2017. In its latest results announcement, the REIT Manager revealed that while it has secured 94.9% occupancy for the commercial space, only 58% of it contributed in the last quarter due to a slight delay in completion. Heartland Boy expects full contribution from the AEI to amount to an additional $3.8 million Net Property Income in 2017.

Indicator 2: Positive Rental Reversions Expected

About 15% of Viva’s portfolio is up for renewal in 2017 and the bulk of it will come from Viva Business Park and UE BizHub East. These are assets operating under the Business Park segment which has been forecasted to perform the best within the industrial sector. For instance, Savills forecast a 3% to 5% increase in rents for Business Park in 2017. Furthermore, the opportunity to experience positive rental reversion is very plausible as these 2 properties remain “under-rented”. For instance, the passing rent at Viva Business Park is estimated at $2.70 psfpm compared to the industrial average of $3.70 psfpm (CBRE’s estimate for Business Parks not located within city fringe). Similarly, UE BizHub East’s passing rent is estimated at $4.36 psfpm by OCBC; much less than the $5 psfpm achieved by comparable buildings in Changi Business Park. The completion of the aforementioned AEI in February 2017 and Downtown Line 3 in end 2017 should also bode well for Viva Industrial Park and UE BizHub (Expo MRT) respectively.

Investment Risks of Viva Industrial Trust

1.Expiry Of Rental Support At UE BizHub East

The biggest concern for unitholders would be the expiry of the rental support arrangement at UE BizHub in November 2018. This is hanging like an albatross around the necks of the REIT Manager. During the latest financial results, Viva Industrial Trust received a total of $2.58 million of rental support in 4Q2016 from the vendors of UE BizHub. Extrapolating this would lead to a total of $10.3 million in rental support for an entire year. Heartland Boy did an estimate on the various sources of future revenue that can help to mitigate the rental support once it comes off in November 2018:

1. Additional estimated $3.8 million in Net Property Income from the AEI at Viva Business Park
2. Additional guaranteed $1.1 million from UE BizHub hotel, $0.2 million from Mauser Singapore, $0.2 million from Jackson Design Hub, $0.15 million from Home Fix Building and 11 Ubi Road due to rental escalation as per their respective master leases

This leads to an additional $5.45 million by Nov 2018 but this still represents a shortfall of $4.87 million. This shortfall would cause DPU to drop by $0.00557, resulting in a yield of only 8.4%. Therefore, potential unitholders should go in with the full knowledge that the real underlying yield may truly be only 8.4%. Heartland Boy is prepared to accept this outcome as this is still above the 8% yield that he is looking for in REITS. Moreover, he is hoping for positive rental reversions and increased occupancies at Viva Business Park and UE BizHub to narrow this rental support gap.

2.Non-renewal From McDermott At Jackson Square

When Viva Industrial Trust announced its latest financial results in January 2017, it revealed that McDermott will not renew its lease at Jackson Square when it expires in April 2017. McDermott currently occupies up to 31% of the NLA at Jackson Square. The REIT Manager has already partially backfilled the vacated space by securing Foxconn, a fellow MNC, on the same rent. That leaves 23% of the space at Jackson Square still vacant. The management has expressed confidence in filling up the remaining space owing to the central location (Toa Payoh) of Jackson Square. Finally, any downside is further protected by the rental support agreement that is be in place till November 2019. This represents ample time for the Manager to secure new tenants to replace McDermott.

3.Limited Debt Headroom

With gearing close to 40%, it seems to suggest that any future acquisitions have to be fully funded by equity. However, gearing may drop once the AEI at Viva Business Park is completed as the asset’s valuation may increase by capitalising its construction cost. Regardless, one might want to avoid using SRS to purchase this stapled group given that rights issue is a strong possibility in the near future.

Conclusion of Viva Industrial Trust

For dividend cash cows such as Viva Industrial Trust, Heartland Boy has no personal target share price. Rather, his investment decision is driven primarily on whether there are counters out there on the market that offer better risk-adjusted returns. With a trailing 12 month dividend yield of 9.1%, Viva Industrial Trust is going to be hard to beat. And, of course, it is a good counter to provide some form of diversification from Croesus Retail Trust and Lippo Mall Trust. However, do note that Viva Industrial Trust may face some headwinds at the end of 2018, so it will be good to keep a close eye going forward.

Vested at 76.5 cents since January 2017

This article was published on 4 Feb 2017.