Viva Industrial trust is an industrial REIT listed on the Singapore stock exchange that has performed fairly well since 2017.
One thing investors should look out for even though the counter has performed fairly well over the last 2 years is the presence of income support.
Viva Industrial Trust’s share price rose from about S$0.7 to a peak of S$0.97 late 2017. It closed at a trading price of S$0.88 on 23 Feb.
The last close price is also higher than IPO of S$0.77.
In Viva Industrial Trust’s financial statements, the income support comes in the form of a “rental support / rental arrangement”.
In Viva Industrial Trust’s FY2017 financial statements, on page 4, they specifically mention the details of the income support.
The term rental differential is used in the financial statements and can be used interchangably with rental / income support.
Why use such technical terms and make it difficult for the layman to understand? -.-
UE Business Hub income support
For UE Business Hub (UEBH), the rental arrangement works as such. The vendor (seller) of UEBH agreed to pay Viva Industrial Trust the rental differential (where the actual net rental income derived from UEBH (excluding the Hotel Leased Premises) is less than an amount of S$26m for each of the first two years, with a step-up of 5% in each of the third and fifth year) for a duration of five years from the listing date.
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So when did Viva Industrial Trust list? 4 Nov 2013.
So in year 1, Viva Industrial Trust is guaranteed actual net rental income of S$26m, in year 2, S$26m is guaranteed, in year 3, S$27.3m (S$26m x 1.05) is guaranteed, same in year 4, and in year 5, S$28.7m is guaranteed.
Rental income support will therefore expire in Nov 2018, 5 years after listing on 4 Nov 2013.
Jackson Square income support
For Jackson Square, the income support is described in Viva Industrial Trust’s 2017 statements as such.
The JS rental support arrangement, pursuant to which the vendor (seller) of JS, Jackson International Private Limited (“JIPL”), agreed to pay Viva Industrial Trust for the rental differential where the actual aggregate gross rental income derived from JS is less than S$58m over the period of five years commencing from the date of acquisition of JS on 21 Nov 2014.
According to the edge Singapore, JIPL will guarantee Viva Industrial Trust an income of about S$11.6m per year (S$58m / 5 years).
The support will start from Nov 2014 and end in Nov 2019.
How much did the income support total up to?
So how much did the income support for these 2 components of Viva Industrial Trust total up to?
In their FY2017 statements, the total amounted to S$14.7m.
This was made up of
- UEBH – Business Park component (gross revenue of S$25.7m and a rental differential of S$8.98m)
- UEBH – Hotel component (gross revenue S$9.0m and a rental differential of S$486,000)
- Jackson Square (gross revenue of S$8.8m and a rental differential of S$5.3m)
This is compared to FY2016, where the total rental differential was S$12.7m, made up of
- UEBH – Business Park component (gross revenue of S$23.8m and a rental differential of $10.9m)
- UEBH – Hotel component (gross revenue of S$9.2m and a rental differential of S$280,000)
- Jackson square (gross revenue of S$10.0m and a rental differential of S$1.6m)
Rental support in FY2017 has increased by 15.7% from FY2016. From S$12.7m to S$14.7m.
How would results have looked like without income support?
For FY2017, Viva Industrial Trust’s total distribution (including income support) declared for the period/year is S$72.3m, higher than FY2016’s S$60.9m.
On a distribution per stapled security basis, the amount is 7.47 Singapore cents in FY2017, higher than 6.96 Singapore cents in FY2016.
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However, without the income support, the distribution per stapled security amount would be 6.44 Singapore cents in FY2017 and 5.77 Singapore cents in FY2016.
This is a marked decrease compared to the amounts with income support.
I heard about the Jackson Square default
So what’s the Jackson Square default all about?
JIPL, a key tenant in Jackson Square (a building) has gone into liquidation.
This means that JIPL is no longer able to honor the income support pledge it gave to Viva Industrial Trust.
Remember the income support is about S$11.6m per year. How will JIPL be able to pay this if they’re in liquidation (bankrupt), and have no money?
It will be tough.
First some background on Jackson Square.
Jackson Square has a GFA of 418,586 sqft and valuation of S$73.2m as of writing.
This means Jackson Square makes up about 10.7% of VIT’s portfolio by GFA, and 5.7% by portfolio valuation.
The largest building by GFA is Viva business Park at 1.5m sqft; The largest building by valuation is UE Business Hub at S$518m.
Furthermore in the “Receipt of Liquidation Notice from Jackson International Private Limited”, the announcement states that three of the tenants in Jackson Square are subsidiares of JIPL.
Talk about concentration risk!
These three tenants take up approximately 24% of the net lettable area of Jackson Square and contribute monthly gross rental income of S$161,692 or approximately 19% of the total gross rental income of Jackson Square for the month of March 2017.
Even though these subsidiaries of JIPL have not filed for liquidation or defaulted on payment, it’s not a good sign that they are related to the parent company, JIPL.
Viva Industrial Trust made some calculations with the following assumptions.
- Viva Industrial Trust keeps the Rental Support Bank Guarantee of approximately S$3.87m
- The operating expenses of Jackson Square do not increase significantly above S$2.0m per annum
With the above assumptions, Viva Industrial Trust says they do not expect the matter to have a material impact on the financials of distributions.
Fall off in distribution per unit after income support expiry
Based solely on VIT’s FY2017 financial statements, it can be seen that the income support props up a fair bit of the distributable income and distribution per stapled security.
As mentioned earlier, the distribution per stapled security for FY2017 will fall from 7.47 Singapore cents to 6.44 Singapore cents if there were no rental support.
What happens after Nov 2018, when UEBH’s rental support falls off, and Nov 2019, when Jackson Square’s rental support falls off?
Imagine it is now end 2018. The numbers on the financial statements are showing that FY2017’s distribution per stapled security is 7.47 Singapore cents (with income support, because it was really taken).
If FY2017’s differental were taken as a guide (7.47 Singapore cents with income support vs 6.44 Singapore cents without income support; or a 14% differential), FY2018’s results will show a large decline in distribution per stapled security against FY2017.
The difference in distribution per stapled security with and without income support isn’t just obvious in FY2017.
In FY2016 financial statements, the numbers also show that distribution per stapled security with income support for VIT is higher than without it.
FY2016’s distribution per stapled security was 6.96 Singapore cents with income support, and 5.77 Singapore cents without income support.
Apparently this hole may be a little too big to be dug out of.
Nevertheless, Viva Industrial Trust has received a proposal for the merger of the REIT and ESR-REIT.
That is a topic for another day.