Viva Industrial Trust - OCBC Investment 2018-05-21: Vis-à-vis La Viva

VIVA INDUSTRIAL TRUST SGX: T8B

Viva Industrial Trust - Vis-à-vis La Viva

Viva Industrial Trust (VIT) has reached an agreement concerning the proposed merger with ESR-REIT. The consideration is to be S$0.96 per VIT unit, 10% of which is to be paid in cash and the remainder to be paid in the form of newly issued ESR-REIT units at an issue price of S$0.54 each.
In effect, each VIT unit is to receive S$0.096 in cash and 1.6 new ESR-REIT units.

We deem the terms are “principal-positive” for VIT unitholders.
Ignore the S$0.54 issue price for a moment. The fair value of these new ESR-REIT units depends on what the value of the merged entity will be. We estimate that this fair value of the merged entity should lie at ~S$0.53 per unit (and above, assuming that there are positive synergies to be gained from the merger).
Overall, our estimate implies that 1 VIT unit can be traded for an aggregate value of at least S$0.942 (including the S$0.096 in cash). Against VIT’s S$0.89 closing price as at 18 May, we see these as “principal-positive” terms for VIT.

We see three main benefits to the merger.
- First, the asset diversification of the enlarged portfolio would mean that the merged entity is less affected by VIT’s fall-off in income support at the end of this year.
- Secondly, the potential to refinance at lower costs and access to a greater pool of financing options.
- Thirdly, higher liquidity and possible inclusion in the investible universe for more institutional funds.
We believe these advantages would outweigh VIT’s dilution of portfolio exposure to business parks, and would provide meaningful uplift to the S$0.53/unit fair value for the merged entity we estimated earlier. For the merger to go through, approvals need to be sought from both ESR-REIT’s and VIT’s unitholders.
Given the favourable terms, we see it in Viva Industrial Trust unitholders’ benefit to accept the offer.

This estimate is based on our fair value of VIT (S$0.90) and on the Bloomberg consensus target prices for ESR-REIT since we do not cover the latter. Adjustments are also made for the cash consideration to be paid.

Much larger portfolio. Total portfolio size would increase from S$1.3b (VIT) to S$3.0b (VIT and ESR-REIT). The enlarged entity would be the fourth largest industrial S-REIT. Having a larger portfolio would provide greater diversification and add resilience to the REIT’s operational performance. i.e. sudden tenant defaults and master lease conversions would likely matter less when the portfolio is sizeable. Assuming the market cap also increases to above S$1b (which is an explicit mandate for several institutional funds), this would also make the REIT an investable asset to more investors.
Dilutes impact of VIT’s fall-off in income support in 2019. Should the merger go through, the fall off in income support will be “spread” across a larger base of distributable income.
Reduces land lease to expiry in next 20 years. The impact of VIT’s short land lease at Viva Business Park will be reduced as a result of the merger.
Access to cheaper financing. The merged REIT will have access to cheaper financing given that its portfolio will be 100% unemcumbered compared to 8% for VIT’s current portfolio.

Deborah Ong OCBC Investment | https://www.iocbc.com/ 2018-05-21

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