Analysis on Viva Industrial REIT

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Viva Industrial Trust (VIT) is a Singapore-focused Business Park and industrial real estate investment trust.

The REIT has the principal investment strategy of investing in a diversified portfolio of income-producing real estate that is predominantly for business parks and other industrial purposes in Singapore and elsewhere in the Asia Pacific region.




VIT’s current property portfolio covers an aggregate gross floor area of 3.9 million sq ft and is strategically located in key business parks and established industrial clusters with an aggregate valuation of close to S$1.3 billion.

Its nine properties serve over 149 tenants with 39.5% of them in information technology, e-business or data centre operations.

This post will go through their fourth quarter 2017 results to see what stands out and highlight things that investors would want to take note of.

None of this constitutes investment advice, so please do your own due diligence!

Gross revenue

Their gross revenue of S$28.3m in 4Q2017 is higher than S$25.6m the same period last year, which to me is a good sign.

Further back in time, gross revenue has been continually increasing, from S$16.6m in 4Q2014 and S$19.7m in 4Q2015.

Between 4Q2014 and 4Q2017, growth in gross revenue came in at 44%.

Net property income

What’s more important than the top line (gross revenue) is the Net Property Income line.

This has also shown growth over the last few years, from S$11.0m in 4Q2014 to S$20.6m in 4Q2017, which is an 87% increase.

The higher growth rate in NPI than gross revenue is a good sign to me because it shows that the manager has been able to cap growth in property expenses.

Distribution amounts

Most importantly however is the distributable amount per share, because this is the amount that ultimately goes into a shareholder’s pocket.

In 4Q2014, the distributable income per share was 1.701 SG cents.

In 4Q2017, the amount rose to 1.857 SG cents, or a 9.2% increase.

Since IPO in 2013, distribution yield has fluctuated between 7.9% to 9.3%.

The distribution yield of 7.9% in 4Q2017 is therefore on the lower end of the historical range.




Financial position

VIT has managed to grow their dollar amount of investment properties through the years, from S$852m in 4Q2014 to S$1.3b in 4Q2017.

I think this is to be expected because if a REIT is not growing, it means that something may be wrong!

A deeper look however shows that this growth may not entirely be of quality.

Why do I say that?

Let’s look at the Net Asset Value (NAV) per share.

As a recap, NAV per share is calculated as Net Assets / No of Stapled Securities Issued and Issuable (aka number of outstanding shares).

It was S$0.758 as of 4Q2014, S$0.813 as of 4Q2015, S$0.791 as of 4Q2016 and S$0.765 as of 4Q2017.

It rose between 4Q2014 and 4Q2015, but started to fall thereafter.

Why did it fall?

The reason is because the numberĀ of stapled securities (issued and issuable) started from a higher base, and growth was faster than net assets.

In 4Q2014, the number of outstanding shares was 622m. In 4Q2017, it was 976m.

This is a 57% increase (of a higher base than net assets).

In 4Q2014, the net assets was S$472m. In 4Q2017, net assets was S$747m.

This is a 58% increase. Marginally higher than the growth in outstanding shares.

Bear in mind that the growth in outstanding shares is from a higher base.

In an absolute amount basis, net assets grew by S$275m, while number of outstanding shares grew by 354m.

This explains why NAV per share has been declining.

Very interestingly however, I noticed that the share price has been in an overall uptrend (starting point is lower than ending point).

Prices have corrected slightly since the beginning of 2018 however.viva industrial trust

At current share price of S$0.88, it is higher than 4Q2017’s NAV of S$0.765.

Is the premium warranted?

Personally, I think that the transformation of Viva Business Park instilled a lot of confidence in investors such that the shares traded at a premium.

As to whether the premium is warranted or may persist, I think it may soften, especially with the income support the REIT is taking on.

Also read: Viva Industrial REIT’s income support

Nevertheless, the REIT appears to be well managed, and the manager has shown it can undertake large scale asset enhancement initiatives with the Viva Business Park transformation.




Gearing ratio and borrowing costs

One thing that investors would need to look out for is the high gearing ratio.

At 39.8% as of 4Q2017, it is higher than the average of most REITs.

Nevertheless, the gearing has fallen from 44.3% as of 4Q2014.

Since IPO, the gearing ratio has fluctuated between 37.2% to 44.3%. 4Q2017’s gearing of 39.8% is therefore at the middle/lower end of the range.

Borrowing costs have stayed within a tight range of 3.79% to 4.0%.

As of 4Q2017, borrowing costs of 3.9% is at the higher end of the historical range.

It is usually rare for borrowing costs to fluctuate widely, and for a short 3-4 year period of time, but any increase in interest rates need to be watched closely by investors.

The largest amount of S$213m of loans will mature in 2020 which is 2 years away, so that gives the manager some time to engage banks in handling any refinancing.

My personal view is that interest rates may rise in future, so a 2020 refinancing window may not actually be beneficial for VIT as rates may be higher at that point than now.

Whatever the case may be, VIT has fixed 84.4% of their interest rate exposure as of 4Q2017 so that will provide much needed visibility and latitude of control for the manager.

Portfolio details

Moving from the financial side of things to the property level, the portfolio has shown improvement in some areas.

Occupancy and reversion

As of 4Q2017, occupancy stood at 90.6%.

There has been improvement every year since IPO, with occupancy at the different years being 4Q2014:76.9%, 4Q2015:87%, 4Q201689.8%.

Rental reversion has also been positive. In the climate where industrial properties are not doing so well, this is a positive sign.

For the whole of 2017, rental reversion was 2.6% over a total of 410,000 sqft of new and renewal leases.

This is a decline from 5.2% for the whole of 2016.

Generally, I think that the positive reversion is good for investors, but the declining trend may need to be watched carefully.

Valuation

Valuation of VIT’s assets concern me a little because between 31 Dec 2016 and 31 Dec 2017, there were more assets being valued at a lower rate than higher.

Assets that were valued lower include

  • Viva Business Park
  • Jackson Square
  • 11 Ubi Road 1

The only asset that was valued higher was UE BizHub East – Business Park component.

The total downward valuation amounted to 3.5m for Viva Business Park + 6.8m for Jackson Square + 2m for 11 Ubi Road 1 = 12.3m.

The total upward valuation for the UE BizHub East – Business Park component was 3m, far short of the downward valuation.

Viva industrial trust valuationThe decline in valuations might portend further falls in NAV per share.

Hopefully the manager will be able to raise rents or occupancy in the assets which will in turn raise valuationsĀ to mitigate the NAV decline.

The UE BizHub East – Business Park component can provide some relief, but I don’t think it will be able to stem the decline.

Tenant concentration

One good point that stands out for VIT is the decreasing reliance of rental to the portfolio’s top 10 tenants.

At 4Q2014, the top 10 tenants contributed 48.1% of monthly rental income.

At 4Q2017, the top 10 tenants contributed 43% of monthly rental income.

Some of the names that were present in both the 4Q2014 and 4Q2017 top 10 list include Cisco, 1-Net Singapore, NTUC Fairprice and Johnson Controls.

Tenants that were present in 4Q2014 but not in 4Q2017 include McDermott Asia Pacific, BT Singapore, CSC Technology, Jackson Global, DFS Venture and Mauser Singapore.

Also read: Condo hunting around Jurong Lake District

Lease expiry

Moving forward, FY2019 will be a year to watch as 32% of leases by underlying gross rental income will be expiring.

This is the highest over the next 5 years (the next highest year where leases are expiring is FY2022 & Beyond when 31% of leases are expiring).

Should the industrial market not pick up in FY2019, the manager will have to do a lot of active management to ensure that tenants are retained, rents can be raised and occupancy maintained/lifted.




Well-run REIT

Overall, VIT appears to be a well run REIT, with occupancy and total assets being increased every year, together with positive rental reversions.

However, I personally think that the declining NAV per share is a cause for concern.

The large amount of loan maturities in 2020 and leases expiring in 2019 would also be something that would keep the manager on their toes in the short term.

At a dividend yield of 7.9%, it definitely is higher than most other REITs. On the yield basis alone, I would not mind picking up a few shares.

However, the income support and declining NAV per share would be something I would want to be very careful about.

Also read: Singapore’s new property launches in 2018



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