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VIVA Industrial Trust more attractive with 9% yield?

Monday, March 6, 2017

Reader:
Any latest thoughts on Viva. The high yield attractive enough now?
AK:
You should question why is the yield relatively higher for VIT?

In my last blog on VIT, I mentioned the very short lease for their Chai Chee property as a concern. Of course, we know that they went ahead and bought another property in Toa Payoh with an even shorter lease. Alamak.


If we look at VIT's total gross floor area or total GFA (i.e. all their properties put together), 2.22 million square feet or 62% of total GFA have about 20 years or less to their land leases left. 


Will the land leases be extended and if extended, at what cost to unitholders? If you are thinking about investing in VIT or are already invested, this has to be a pertinent question.

If you think 20 years sounds like a relatively long time, take a closer look and you will see that of the 2.22 million square feet of GFA, almost 88% have about 14 years or less to their land leases left!


To be more exact, 1.95 million square feet have about 14 years or less to their land leases left! That is 54% of the REIT's total GFA!

How is that for a wake up call?

This means that 13 to 14 years from now, we could see half of VIT's distributable income vanishing into thin air. 


What would the 9% distribution yield or so at 77c a unit become then?

Cash flow would almost definitely take a plunge while we have to remember that the REIT's borrowings will probably stay the same since they are not amortized.

VIT's current gearing level is almost 40% and their interest cover ratio is about 4x. We don't even need rising interest rates to wreak havoc on VIT's numbers. If operational cash flow reduces by half or more, the REIT's interest cover ratio is in jeopardy.


I would rather sacrifice 1% yield and invest in AIMS AMP Capital Industrial REIT for a slightly lower 8% yield if I want exposure to Industrial S-REITs. Peace of mind is priceless.

AIMS AMP Capital Industrial REIT's current gearing level is about 35% and their interest cover ratio is about 5x. Stronger numbers? You bet.


I shared this during a workshop last year and again at a private event recently.

A REIT should think about improving the attributes of its assets which includes having longer land leases. 

Recycling capital by selling assets with shorter remaining land leases into assets with longer land leases, all else remaining equal, for example, is a sensible thing to do.

A good example would be the recent divestment of a property with a remaining land lease of 17 years by Cache Logistics Trust which used the proceeds to buy a freehold industrial property in Australia with a Net Property Income (NPI) yield of 7.4% with yearly rental escalation built in.

Being attracted by high yields could be like a moth being attracted to a candle flame if we are not careful.

Related post:
VIVA Industrial Trust not in my shopping list.

14 comments:

arithmos said...

Thank you. I got some of this stuff when I bought it low during some little crisis. Timely reminder on this.

Will find a time to unload it.

AK71 said...

Hi arithmos,

Well, all investments are good at the right price. :)

Arthur Ong said...

Useful insights into Viva Trust. TQ AK Trust.

AK71 said...

Hi Arthur,

Aiyoh, I anyhow talking to myself only. -.-"

MSAPersonalFinance said...

Hi AK71,

Thanks for your sharing!
At least it is very useful info for me.

AK71 said...

Hi MSA,

I am glad. :)

jojo said...

This post reminds me why I love reading your blog. So insightful and analytical. AK, you may be talking to yourself but let me tell you that all we kay-poh eavesdroppers, gain a lot by just silently listening in!

AK71 said...

Hi jojo,

Aiyoh. Don't like that say. I shy.

Most of the time, I just talk a lot of nonsense to myself. ;p

Chee Yung Pong said...

After saw your porfolio and blog about this Viva can see that you are just better than some average investers,浪得虚名。

1AIMS did some fund recycling and AEI to improve NAV,good strategy, their management achieved above average occupancy good,35% Gearing,Safe ,but the Porfolio 没有活力,死气沉沉,I think it can only maintain but not much improvement.

2First I saw all the problem you seen from Viva, but I really respect Viva Manager Wilson Ang Poh Seong.He manage to improve the Valuation of Chai Chee Technopark from 170mil to now 350mil,full year NPI may increase 12 mil or more.The management able to bring in Decathlon and signed super long lease,16 years I think,u may want to go to Bedok to take a look, they brought in Gym,Tuition Centre,Galore Ice Cream.The office space rental and occupancy also brought up by the vibrancy of Viva Business City.

3Viva properties valuation grow from 700mil to now 1300 mil in just 3 years?Who gave the fund?They only did 1 preferential issue 1 for every 7 unit at 71.5 cents

4Based on Viva leases structure and tenants base, their income flow are clear and stable.

5I think they will have at least 100 mil acquisitions every year, do you think after 12 years 14 years the land lease ended the viva are still the viva?They have a lot of choice either to sell these properties before the lease end or have a chance to renew.

6I think you are too bias as you hold too much of AIMS.You don't really study hard before you wrote a blog about Viva,you are just famous for those who can't point out your mistakes.

Chee Yung Pong said...

浪得虚名,不懂Viva 的详细情况就乱写

AK71 said...

Dear Chee,

Thank you for sharing your opinion. :)

F4FF said...

"Viva Industrial Trust: Building manager Jackson International files for liquidation" - Straits Times

:0!!!

AK71 said...

Hi F4FF,

"The plight of facilities manager Jackson International means Viva loses a guarantee that would have protected it from any drop in rental income..."

The clock is ticking.

AK71 said...

Full article:
Viva Industrial Trust said on Sunday night (April 23) that facilities manager Jackson International has filed for liquidation.

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