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:
- non-renewal by McDermott,
- expiry of rental support for UEBH business park component in FY18, and
- 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).
Target Price: N/A