Viva Industrial Trust - RHB Invest 2017-10-30: Another Stellar Quarter

VIVA INDUSTRIAL TRUST T8B.SI

Viva Industrial Trust - Another Stellar Quarter

Viva Industrial Trust’s 3Q17 results came within our expectations. The occupancy rate for VBP’s white space continues to improve, with spill-over effects starting to be seen in VBP’s business park.
UEBH is also poised to benefit from the recent opening of DTL-3. Positive rental reversions are set to continue, with improving fundamentals in the industrial market. Despite the challenging conditions, Viva continues to impress via well-planned asset enhancements and yield-accretive acquisitions.

The occupancy rate for Viva Business Park’s (VBP) white space increased 3.9ppt QoQ to 96.2%. The asset enhancement initiative (AEI) works are now fully completed. The spill-over effects from the vibrant VBP retail unit are starting to show in the business park component, with the increase in tenant leasing enquiries and positive rental reversions (+3% YTD).
We see more upside for occupancy (currently 79% overall) and rental rates at VBP’s business parks segment, on the back of favourable demand-supply dynamics for business park space.

With the recent opening of Downtown Line Phase-3 (DTL-3), UE Biz Hub East (UEBH) now enjoys better connectivity with a direct subway link to the train station. Viva Industrial Trust (Viva) also plans to embark on an asset rebranding exercise to further improve vibrancy.
About 6.3% of UEBH leases are due for renewal in 2018, for which we expect high single-digit rental reversions. However, the rental rates (signed) are likely to be lower than the implied rental guarantee of ~SGD5.50psf. The rental support for UEBH (business parks) will expire in Nov 2018.

The strong rebound in Singapore’s 3Q17 GDP growth (+4.6% YoY), led by sharp manufacturing sector growth (+15.5%) augurs well for industrial sector demand.
Also, the business park segment, which accounts for > 50% of Viva’s portfolio, is set to benefit from the limited supply pipeline. Thus, we expect its portfolio to see positive mid-single digit rental reversions (3Q17: 2.4%) for 16% of its leases expiring in FY18.

Inland Revenue Authority of Singapore (IRAS) has replied that it will not make an advance tax ruling on tax treatment for rental support. The tax treatment would, instead, be determined at the tax assessment stage, ie Apr 2018.
To recap, Viva had earlier submitted an application to allow tax transparency for rental income support payments, in light of the amendment in the Income Tax Act (1Q17). We haven’t factored any potential saving from taxes which if granted can lift our FY17F/18F DPU by ~3%.

We lift our FY17F-18F DPU by 2%/3% to reflect better-than-expected contributions from VBP and higher gross margins. In our DDM valuation, we cut our COE to 7.9% from 8.2% to better reflect the current low-interest rate environment.
Risks to our call are non-extension of the land lease-tenure for VBP, master lessees defaulting and an economic slowdown.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-30

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