Viva Industrial Trust is an industrial REIT from Singapore with total assets valued at $1.3 billion as of 31st March 2018. Recently, their biggest news has been their proposed merger with ESR-REIT, formerly known as Cambridge Industrial REIT. So you maybe wondering, should you buy Viva Industrial Trust? By the way, we also wrote an article on 800 Super Share Price and Singtel Share Price if you are looking to invest to make passive income in Singapore.
What is Viva Industrial Trust?
Viva Industrial Trust is a relatively young REIT, only listed on SGX on 4th November 2013. Viva Industrial Trust (VIT) focusses on “ 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”, as quoted from their 2017 Annual Report. Before we get into the merger, let’s look at Viva Industrial Trust first.
Viva Industrial Trust Property Profile
Viva Industrial Trust is the proud owner of 9 properties, 2 of which are Business Parks, 4 of which are Light Industrial Properties and the remaining 3 being Logistics related properties.
With a total of 3.9 million square feet of lettable space, the properties are currently valued at $1.28 billion.
Of their 2 business parks, UE BizHub EAST, holds a hotel component as well. Both business parks amounts for more than half of Net Lettable Area, which naturally means that they are the key revenue drivers of VIT.
From this image extracted from their latest presentation, we can see that Business Parks and Hotel amounts for 79% of the revenue even though the they stands for 54% of Net Lettable Area.
Viva Industrial Trust Land Lease Concern
As of 30th June 2018, VIT has an weighted average land lease of 33.4 years. What I would like to highlight are three properties, Viva Business Park and Jackson Square, who has 13 years and 11 years of land lease left respectively.
This could be cause for concern as Viva Business Park alone generates $41.8 million out of $111.6 milion for FY2017 and stands for 27.3% of VIT’s overall portfolio value. Jackson Square generates $8.8 million out $111.6 million for FY2017 and stands for 5.7% of VIT’s overall portfolio value. With the expiry of Viva Business Park and Jackson Square’s land lease, VIT risk losing 33% of their revenue to 2 properties.
Five of VIT’s nine properties are single-tenanted properties. Out of the remaining four, Viva Business Park has the most tenants with 88 tenants. Jackson Square has 22 tenants. UE Bizhub East has 32 tenants + 4 from their hotel component. 11 Ubi Road 1 has 5 tenants.
With the expiry of Viva Business Park and Jackson Square’s land lease, VIT risk losing 110 tenants, which will be a huge hit to their tenant-mix.
The last remaining land lease concern that I have is regarding five other properties under VIT, which I found in page 109 of their FY2017 annual report, way below page 30 where property profiles is shown.
This images from VIT’s FY2017 annual report shows clearly the remaining land lease of the buildings owned by VIT.
Other than Viva Business Park and Jackson Square, we can see than 30 Pioneer Road, 11 Ubi Road 1, Home-Fix Building, Jackson Design Hub and UE BizHub East all have less than 20 years of lease left with an option to increase the lease by 30 years.
Therefore, this looks like additional expenses after about 20 years and the portfolio’s average land lease doesn’t look as long as it seems to be.
Viva Industrial Trust Stock Chart
Trading at $0.90, VIT currently has a impressive distribution yield of 8.3%.
Viva Industrial Trust Finances
After looking at the properties and units, let’s take a look under at the financial figures and ratios of VIT. The financial figures and ratios that I am interested to look at are portfolio value, net property income, earnings per unit, distribution per unit, Net Asset Value per unit, WALE, gearing ratio and no. of units.
|Portfolio Value||$743 million||$853 million||$1.12 billion||$1.2 billion||$1.28 billion|
|Net Property Income||$6 million||$40.7 million||$50.8 million||$68.48 million||$81.8 million|
|Earnings Per Unit||0.135 cents||7.641 cents||14.66 cents||4.885 cents||3.99 cents|
|Distribution Per Unit||1.08 cents||6.833 cents||7.0 cents||6.958 cents||7.472 cents|
|NAV per unit||75 cents||75.8 cents||81.3 cents||79.1 cents||76.51 cents|
|Weighted Average Leasing Expiry||3.4 years||3.8 years||3.8 years||3.1 years||2.6 years|
|No. of units||594,000,275||621,883,637||863,118,597||964,574,084||972,658,241|
Since IPO, VIT has been very driven in increasing their portfolio size and net property income, which has resulted in increasing Earnings and Distribution per Unit. These are all positive things that unitholders like to see.
However, we need to look at the price of these increment. In the same 5 years, NAV per unit has not been increasing much. This is due to the massive dilution of units within 5 years. VIT has increased the number of units by more than 60% since IPO. This is still fine due to the inherent characteristics of REITs. Not totally welcomed, but still fine.
Next we look at the amount of distributions that unitholders will receive. Although distributions has been increasing every year, resulting in a high yield as compared to trading price, however, there is a trend where distribution per unit is more than earnings per unit.
With the exception of 2014, where EPU is more than DPU, VIT has been issuing more distributions than money they make. I included 2015 in the mix as the sudden spike in EPU for 2015 is more of an accounting income than actual property income. This tells me one thing, DPU will decreased in the future.
Gearing ratio has never been below 37.2%, creeping very close to the 40% mark. This gives VIT very little leverage power, which forces the manager to seek further capital from unitholders for capital, which results in the massive dilution in units.
Despite the expansion, VIT has seen a continuous reduction in the Weighted Average Leasing Expiry, from 3.4 years in 2013 to 2.6 years in 2017. Not long at all.
Viva Industrial Trust Proposed Merger
On 18th May 2018, the manager of ESR-REIT and VIT issued a joint statement that of a proposed merger to create the 4th largest industrial REIT in Singapore. The merger will be done by way of a trust scheme of arrangement.
VIT unitholders will be expected to receive $0.96 per share as well as 1.6 newly created ESR-REIT units per share.
In order for the merger to be accepted, 50% of VIT unitholders will have to vote to approve either in person or by proxy at the scheme meeting
After merger, VIT will be delisted from SGX and VIT will be owned by ESR-REIT.
Should you buy Viva Industrial Trust?
My opinion is that although VIT has grown a lot for the past 5 years and has produced amazing distribution yield, I have a lot of concerns for many other aspects of VIT, therefore, I rather look into other REITs. As I am an ESR-REIT unitholder, I am not very enthusiastic on the merger going through. However, if I am an VIT unitholder, the deal would be very pleasant for me.
As a unitholder of ESR-REIT, I was invited to attend the SIAS-ESR-REIT Dialogue Session, click here for my observations and opinions.
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