Viva Industrial Trust - RHB Invest 2017-07-27: Delivering The Goods

Viva Industrial Trust - RHB Invest 2017-07-27: Delivering The Goods VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Delivering The Goods

  • Viva's strong set of 2Q numbers were within our expectations. We expect earnings to improve in the coming quarters, with full contributions from VBP’s AEIs kicking in. 
  • The occupancy rate for JS bounced back strongly to 89% during the quarter (1Q17: 74%), a testament to the REIT manager's leasing capabilities. 
  • Overall, we expect the positive rent reversions (1H17: +4.3%) to continue, with the bulk of expiring leases (2017F-2019F) in the favourable business park segment. 
  • A favourable ruling on the tax transparency treatment for rental support would further uplift our FY17F-18F DPU by +3%. 
  • Maintain BUY with an unchanged TP of SGD0.97 (5% upside).

DPU rises 6.3% YoY, while results are in line with estimates. 

  • Viva Industrial Trust’s (Viva) 2Q17 and 1H17 DPU accounted for 25% and 50% of our full-year estimate respectively. Its gross revenue and NPI for the quarter rose 18% YoY and 17.5% YoY respectively, mainly due to contributions from the 6 Chin Bee Avenue acquisition and higher income from Viva Business Park (VBP)
  • In 2Q17, Viva prudently made full tax provisions for the SGD4.9m settlement amount from Jackson Square (JS), which resulted in a higher one-off tax expense of c.SGD0.7m. 
  • If it were not for the tax provision, the REIT’s DPU would have been much higher at SGD0.0193 (+10.2%YoY).

VBP is shaping up nicely. 

  • Asset enhancement works at VBP are fully completed, with white space having a committed occupancy rate of 92.3%. However, only 63.6% of total white space contributed to 2Q17 income, as the remaining tenants are still in their fit-out (ie rent-free) periods. 
  • 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 food and beverage outlets. 
  • As we anticipated, the spill-over effects of having a vibrant tenant mix at VBP are starting to filter into the business park component, with a positive rental reversion of +7% in 2Q17, compared to +2% in 1Q17.

JS occupancy rate bounces back to 89%. 

  • In 2Q17, Viva signed new leases of over 70,000 sqf in JS, bringing the occupancy rate back to 89%. Its key new tenants include PSBA, which will occupy over 50,000 sqf in the building. Based on our calculations, Viva still has ~SGD4.1m in unutilised income from the settlement agreement. 
  • We believe this should be more than sufficient to maintain the initial rent guarantee amount of SGD11.6m pa (up until 2019) for the property.

Favourable tax transparency ruling would lift DPU by ~3%. 

  • Viva has submitted an application to the Inland Revenue Authority of Singapore regarding the tax transparency treatment for rental support agreements. This comes on the back of the amendment in the Income Tax Act (1Q17) to allow tax transparency treatment for rental income support payments – although this would be subject to certain conditions being met. 
  • We believe there is a good chance of a favourable ruling – this could save Viva ~SGD2m in tax income for FY17F-18F, and boost its distributable income by ~3%. Our model currently does not reflect this potential upside.

Maintain BUY. 

  • Our unchanged DDM-derived TP of SGD0.97 is based on a CoE of negative 8.2% and a 0% terminal growth rate. 
  • Key risks to our TP and assumptions are the non-extension of land lease tenures for VBP, potential defaults by its master lessees and the Singapore economy falling into a recession.

Vijay Natarajan RHB Invest | 2017-07-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.970 Same 0.970