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.

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.

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).

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.

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.

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).

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

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