Viva Industrial Trust - CIMB Research 2017-08-18: Semi-charmed Kind Of Life

Viva Industrial Trust - CIMB Research 2017-08-18: Semi-charmed Kind Of Life VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Semi-charmed Kind Of Life

  • Viva Industrial Trust (VIT) has been one of the top outperformers in the S-REIT universe, gaining c.22% YTD. Bloomberg consensus estimates that VIT will deliver 8.3% FY18F dividend yield.
  • The REIT appears to lead a semi-charmed life, with successful settlement of Jackson Square, completed AEI at Viva Business Park and potential upside from tax writeback.
  • VIT has reached a settlement with JIPL whereby it would receive an S$4.9m payment.
  • Also, JS has proved resilient, with occupancy at 89% for 2Q17 (1Q17: 91%).
  • The manager believes that quarterly DPU will continue to improve qoq over the next 2-3 quarters, with contribution from the third phase of AEI for VBP.
  • Should VIT receive a favourable tax ruling, 1H17 tax expenses of S$1.7m (0.0175 Scts/unit) may be written back.



One-day non-deal roadshow in Kuala Lumpur, Malaysia 

  • We recently spent some time on the road in Kuala Lumpur with Viva Industrial Trust (VIT)’s Head of Investment Mr Frank Ng and Investor Relations Manager Ms Lyn Ong. 
  • Underpinned by qoq improvement in 2Q17 DPU, VIT has been one of the top outperformers in the S-REIT universe, gaining c.22% YTD. During the NDR, investors displayed interest in the REIT, with most having done their homework on the company before meetings.


Favourable conditions. 2Q17: DPU continues to buck the industry trend 

  • Viva Industrial Trust (VIT) continued to outperform its small/mid-cap industrial peers, delivering qoq improvement in its 2Q17 DPU. For 2Q17, the REIT registered 1.861 Scts DPU (+6.3% yoy, +0.4% qoq). If not for the one-off tax provision (which we elaborate on in later paragraphs), we calculate that 2Q17 DPU would have been 1.935 Scts (+10.6% yoy).
  • Driven mainly by inorganic contribution from 6 Chin Bee Ave (acquisition was completed on 16 Jan 2017) and organic improvement in Viva Business Park (VBP), VIT registered double-digit yoy improvement in revenue, NPI and distributable income. The improvements were partially offset by lower contribution from Jackson Square (JS).
  • We note that 2Q17 distribution declared was 18.9% higher yoy, while distributable income was 38.4% higher yoy. The variance was due to VIT not fully distributing the S$4.9m proceeds from the settlement agreement with Jackson International Private Limited (JIPL). The distribution declared for 2Q17 was based on the assumption that the JS rental support agreement would still be in place, notwithstanding the JS rental support settlement.
  • Recall that JIPL, the vendor of JS, had agreed to top-up the shortfall for JS if gross rental collection for the property fell below S$11.6m p.a. The JS rental support agreement was for five years and commenced on 21 Nov 2014, the date of the JS acquisition.


Successfully backfills Jackson Square (JS) 

  • On 23 Apr 2017, VIT received a liquidation notice from Jackson International Pte Ltd (JIPL), which meant that JIPL would not be able to fulfill its obligations under the JS rental support agreement. 
  • JIPL’s liquidation came at the same time that the anchor tenant of JS (US oil services company, McDermott Asia Pacific) chose not to renew its lease that expired in Apr 2017. As at 31 Mar 2017, McDermott accounted for around 2.7% of VIT’s rental income; and occupied around 82k sq ft of JS (or 23% of the property’s net lettable area).
  • On 21 May 2017, VIT reached a settlement agreement with JIPL under which the REIT would receive an S$4.9m payment and JIPL would be discharged from its obligations under the JS rental support agreement. The manager estimates that the S$4.9m settlement would be sufficient to cover the rental support agreement until end-2018F.
  • Impressively, the REIT managed to backfill the space vacated by McDermott in 2Q17. VIT signed new leases for over 70k sq ft. Private education centre PSB Academy (PSBA) took up c.15% of the property’s NLA (over 50k sq ft of space), while telco MyRepublic took up another c.5%. In line with market conditions, we understand that the rental reversion for the PSBA lease was a negative highsingle digit.
  • Owing to the successful backfilling of space, occupancy for JS was resilient at 89% at end-2Q17 vs. 91% at end-1Q17. In part, the resilient occupancy rate is a testament to JS’s central location at Toa Payoh.
  • Looking ahead, the manager noted that the remaining land lease tenure for JS is around 12 years. At the same time, it pointed out that the gross plot ratio for JS has not been fully utilised. Hence, the manager is evaluating asset enhancement initiative (AEI) opportunities for the property. The potential investment commitment could help VIT when it applies for a land lease extension for JS.
  • Lastly, as JS comprises four discrete blocks of 2- to 6-storey light industrial complex, the manager deems that any AEI would not be too disruptive to existing tenants.


Tax transparency for rental income support payments 

  • In 1Q17, the Income Tax Act was amended to allow tax transparency treatment to be accorded to rental income support payments (subject to certain conditions being met). VIT is awaiting the outcome of an advance tax ruling by Inland Revenue Authority of Singapore (IRAS) on the tax transparency for rental support received/receivable in 2017 onwards.
  • Pending the outcome of the advance tax ruling, the REIT has continued to provide for income tax expenses for rental income support received/receivable under the UE BizHub East (UEBH) and JS rental support arrangements.
  • Accordingly, income tax expense for 2Q17 was S$1.2m, which was S$0.7m or 147% higher than that of 1Q17. The higher qoq tax expense was due to the S$4.9m JS rental support settlement.
  • Should VIT receive a favourable advance tax ruling, it estimates 1H17 tax expenses of S$1.7m (or 0.175 Scts/unit) could be written back. The company also thinks there could be tax savings on future rental support from UEBH.


Viva Business Park (VBP) AEI completed 

  • AEI for VBP is fully completed, with the third and final phase of AEI obtaining the temporary occupation permit (TOP) in May 2017. The new block welcomed new tenants such as Harvey Norman, Gorilla Climbing Gym and True Fitness.
  • Notably, Harvey Norman joined French sporting goods store, Decathalon (located where thefirst phase of AEI was performed) as one of two anchor tenants for VBP retail space. Taking up 38.5k s q ft of space on two floors (c.20% of VBP’s “white” space) is Harvey Norman’s first Singapore factory outlet, offering consumers a comprehensive range of products including electrical appliances, computers, furniture and bedding at bargain prices.
  • With the opening of the above retail outlets, 92.3% of VBP’s “white” space has been committed. However, only 63.6% of total “white” space contributed to 2Q17 income. Hence, the manager believes that the DPU will continue qoq over the next 2-3 quarters, with additional contribution from the third phase of AEI.
  • Furthermore, the improved amenities have made VBP a more attractive “workshop-dine-play” destination, leading to tenants at the business park component signing higher rentals. VBP registered +7% rental reversion in 2Q17 (1Q17: +2%, FY16: +2%).
  • As at 30 Jun 2017, occupancy for VBP was c.78% (business park component: c.75%; retail: c.92%). Meanwhile, portfolio occupancy stood at 90.6% (-0.5% pts qoq, +2.7% pts yoy).


Risk: Rental support for UEBH expires in FY18F 

  • During the NDR, a common area of concern for investors was the expiry of rental support for UEBH’s business park component in Nov 2018. In 2016, UEBH’s business park component contributed S$23.8m to group revenue (25.1% of FY16 revenue), while rental support for UEBH was S$10.9m.
  • We understand that the current passing rent for UEBH is around S$4 psf pm, while occupancy is c.91%. To bridge the S$10.9m income gap when the rental support expires, management estimates that the passing rent of UEBH needs to increase to S$4.70-5.00 psf pm while occupancy has to be in excess of 95%.
  • Nonetheless, with very little business park supply post-2016, management is optimistic about raising asking rents for UEBH. It noted that neighbouring ONE@Changi City is asking for S$4.50-5.50 psf pm. In addition, the completion of the new Downtown line station (Expo station) slated for Oct 2017 would increase the accessibility of UEBH and enables VIT to negotiate for higher rents.
  • Additionally, some of the shortfall could be partially offset by an additional S$1m p.a. from UEBH’s hotel component (as a result of the 10-year master lease agreement that started in Nov 2013).
  • More importantly, management believes that the increasing contribution from VBP would help to offset the absence of income support. It also highlighted that, on a portfolio basis, VIT has over the years, decreased its reliance on income support.
  • Lastly, on multi-tenanted building (MTB) conversion risks, we note that the Mauser Singapore master lease (2.0% of FY16 revenue) will expire in 2019F, with an option to renew for another five years. Otherwise, majority of VIT’s leases expiring in 2017-19F are at VBP and UEBH. In 1H17, VIT executed c.256k sq ft of lease renewals/new leases and achieved positive portfolio rental reversion of 4.3%.


Valuation

  • VIT has been one of the top outperformers in the S-REIT universe, gaining c.22% YTD. Based on Bloomberg consensus estimates, it is now trading at 8.3% FY18F dividend yield and 1.16x current P/BV. Hence, VIT is still the highest-yielding industrial REIT currently
  • Consensus has arrived at a target price of S$0.96, which suggests potential total returns of 12.6% in FY18F (4.3% potential upside + 8.3% FY17F dividend yield).

NOT RATED
Target Price: N/A




YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-08-18
CIMB Research SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998.000 Same 99998.000



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