Any latest thoughts on Viva. The high yield attractive enough now?
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.
VIVA Industrial Trust not in my shopping list.
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