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Viva Industrial Trust - CIMB Research 2017-01-09: Rose among the thorns

Viva Industrial Trust - CIMB Research 2017-01-09: Rose among the thorns VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Rose among the thorns

  • Viva Industrial Trust (VIT) is a Singapore-focused business park and industrial trust. Based on Bloomberg estimates, VIT is trading at 9.5% FY17 dividend yield, highest in the sub-sector.
  • Unlike its small-cap counterparts that reported an average 13.4% yoy decline in 3Q16 DPU, VIT registered a 9.7% yoy increase in 3Q16 DPU.
  • Its DPU growth has been driven by acquisitions and AEI at VBP. Management expects DPU growth qoq in next few quarters due to rising contribution from VBP.
  • Risks are: 
    1. non-renewal by McDermott, 
    2. expiry of rental support for UEBH business park component in FY18, and 
    3. short land lease tenure.


Highest-yielding industrial S-REIT currently 

  • VIT is a Singapore-focused business park and industrial trust. Including the proposed acquisition of 6 Chin Bee Avenue, the group has a total of nine assets with AUM of S$1.3bn and aggregate NLA of 3.3m sq ft. 
  • As business parks make up 54.2% of the group’s AUM, the group has the highest concentration of business parks among the SREITs.
  • Based on Bloomberg estimates, VIT is trading at 9.5% FY17 dividend yield, making it the highest-yielding industrial S-REIT currently.



Rose among the thorns 

  • In contrast to its small-cap counterparts that reported an average 13.4% yoy decline in 3Q16 DPU (market-cap weighted average), VIT bucked the trend and registered a 9.7% yoy increase in 3Q16 DPU. 
  • Its DPU growth has been driven by acquisitions and asset enhancement inititative (AEI) at Viva Business Park (VBP).


AEI at Viva Business Park 

  • Recall that in May 15, VIT announced its plan to maximise the “white” space at VBP (15% of total space) and to transform the business park into a “work-play-eat-shop” destination in the Chai Chee neighborhood. Average passing rent for the “white” space is about 2x that of the industrial space. 
  • For the next few quarters, management believes there could be DPU growth qoq as 93.4% of the “white” space has been committed. Only 43% of the “white” space contributed to 3Q16 DPU, indicating room for upside.


Inorganic growth with built-in stability 

  • Including the proposed acquisition of 6 Chin Bee Avenue, VIT has expanded its initial portfolio of three properties worth S$0.7bn to a total of nine assets worth S$1.3bn. The latest acquisition is expected to be slightly DPU accretive. 
  • Additionally, 76.1% of 3Q16 rental income was derived from master lease and full rental support arrangements.
  • Nonetheless, VIT has been working to decrease its reliance on rental support.


Risks I: non-renewal risk 

  • Given its high yield, we focus on downside risks. We understand from management that McDermott (top 10 client; accounted for 3.8% of the group’s rental income in Sep 16) would not be renewing its lease in Jackson Square (expires in Apr 17). 
  • Downside is mitigated by rental guarantee for Jackson Square (until 2019). 
  • Additionally, VIT has partially backfilled the space and does not foresee issues in finding tenants due to Jackson Square’s central location (Toa Payoh).


Risks II: rental support for UEBH, short land lease tenure 

  • The rental support for UE BizHub’s (UEBH) business park component expires in Nov 2018. A material gap exists between the passing rent of UEBH and implied rent under the rental support arrangement. 
  • In the worst-case scenario, management deems that rising contribution from VBP could offset the absence of income support. 
  • Also, VIT has a weighted average land lease of 35.1 years. The manager remains confident of renewing the remaining 15.3-year land lease for VBP (at end-15).



NOT RATED
Target Price: N/A




YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-01-09
CIMB Research SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998





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