Viva Industrial Trust - RHB Invest 2017-07-18: Gathering Momentum

VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Gathering Momentum

Viva has announced the completion of its AEI and the opening of Harvey Norman’s first ever factory outlet at Viva Business Park (VBP).
We are positive on the rejuvenation of VBP (white space) and expect a positive spill-over effect on its business park component. Our checks also indicate healthy leasing interest for JS, which should lead to higher occupancy rates and mitigate investor concerns over the asset.

Additionally, a favourable ruling on the tax transparency treatment for rental support would lift our DPU estimates by ~3%.
Maintain BUY, with a TP of SGD0.97 (from SGD0.85, 6% upside).

Viva Industrial Trust’s (Viva) asset enhancement initiative (AEI) at Viva Business Park (VBP) has now been fully completed. Its committed occupancy rate (for white space) of 95.6% is better than what we expected.
VBP’s differential tenant mix includes Harvey Norman’s first-ever Singapore factory outlet (38,500 sqf), Gorilla Climbing Gym, Decathlon Singapore, HAN Junior, My Outlets Global Halal Hub and a wide-range of F&B outlets.
Amid a challenging retail climate, we believe VBP’s differentiated offering of sports & fitness and family-oriented themes stands out and would appeal to a wide range of people. We also expect this to have a positive spill-over effect on its business park component rental and occupancy rates.
Overall, we expect VBP (white space) to contribute NPI of SGD 7.7m, or 9% of total NPI, in FY18F.

Our channel checks indicate there are healthy leasing enquiries, due to JS’ central location. This should translate to higher occupancy rates. As at 1Q17, its occupancy rate is at 74% and we expect it rebound to 85-90% by the end of the year.
Based on commercial website listings (link here) asking rental rates are at SGD2.20- 2.80psf, in line with the market.
Additionally, the recent change in rental support arrangement to a settlement guarantee (SGD4.9m) would provide Viva with more flexibility on income top-up and is also likely to be exempted from taxes.

In May 2017, Viva said that it applied to the Inland Revenue Authority of Singapore on tax transparency treatment for rental support agreements. This comes on the back of an amendment in the Income Tax Act (1Q17) to allow tax transparency treatment for rental income support payments – subject to certain conditions being met.
We believe there is a good chance of a favourable ruling, which can potentially save the REIT ~SGD2m in tax income for FY17F-18F, and boost distributable income by ~3%. Our model currently does not reflect this potential upside.

We have raised our FY17F-19F DPU by 1%/2%3% respectively, factoring in higher occupancy and rental rates for VBP and UE Bizhub East.
Additionally, we also cut our DDM model’s CoE assumption to 8.2% (from 8.5%) by lowering our risk-free rate assumptions.
Key risks to our TP and assumptions are the non-extension of land lease-tenures for VBP, potential default by its master lessees and Singaporean economy falling into a recession.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-18

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.97 Up 0.850