Viva Industrial Trust - RHB Invest 2017-05-22: Positive Settlement Agreement With JIPL

Viva Industrial Trust - RHB Invest 2017-05-22: Positive Settlement Agreement With JIPL VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Positive Settlement Agreement With JIPL

  • Viva announced a settlement arrangement with JIPL this morning, that would result in a higher rent guarantee buffer and better occupancy at its JS property. The move is positive and would mitigate market concerns over the potential drop in rental income. 
  • We expect occupancy at JS to move back to 85-90% by the end of the year, owing to its central location. 
  • The stock offers attractive yields of 9.1%/9.3% for FY17F/18F. 
  • Key catalysts ahead include higher contributions from VBP, positive rent reversions, and potential tax transparency treatment for rental support income. 
  • Maintain BUY recommendation with unchanged TP of SGD0.85.

What’s new: 

Viva Industrial Trust (Viva) announced a settlement agreement with Jackson International Private Ltd (JIPL) and Mr Tan Phong Guan in relation to the Jackson Square (JS) property. 

  • The key terms of settlement agreement are: 
    1. The appointment of JIPL as the integrated facilities manager of JS pursuant to the integrated facilities management agreement (IFMA) dated 21 Nov 2014 shall be terminated, and all parties to the IFMA shall be fully released and discharged from their respective obligations under the IFMA; 
    2. In exchange, Viva would receive an additional cash payment of SGD1m, and shall not be obstructed from calling upon the rental support bank guarantee of SGD3.9m; 
    3. JIPL subsidiaries, which occupy 24% of NLA at the property, would continue to operate and Viva would receive additional security deposits amounting to SGD1.7m in relation to their leases.

Our view: 

The move is positive as it increases the rent guarantee buffer for the property to SGD4.9m from SGD3.9m. 

  • Recall that the rental topup for JS was only SGD1.56m in 2016. Thus the available rent guarantee buffer covers for about 3.14 years, assuming a similar rental top-up.
  • In addition, the continuation of operations by JIPL subsidiaries at JS would result in the property at least maintaining the current occupancy of 74% (vs 50% had JIPL terminated). We believe Viva would be able to bring the property’s occupancy closer to 85-90% by the end of the year, as the building is in a central location (walking distance to Braddell MRT).
  • Viva is currently in discussions to appoint a new facilities manager for the property, and we do not expect operating expenses to increase significantly from the current SGD2m pa.
  • With the additional cash buffer and better occupancy levels ahead, we do not expect any impact on our DPU estimates from the termination of the IFMA.
  • Overall, we continue to remain positive and maintain our BUY call on Viva, with an unchanged TP of SGD0.85. 

Key catalysts ahead include: 

  1. Higher contributions from Viva Business Park (VBP); 
  2. Positive rent reversions from the business park space; 
  3. Viva obtaining tax transparency for rental income support agreements.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-22
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.850 Same 0.850