Viva Industrial Trust Rose among the thorns

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1 REIT Singapore January 9, 2017 Eyes on the Ground Singapore NON RATED Current price: Consensus Tgt Price: Up/downside: Reuters: Bloomberg: Market cap: Average daily turnover: S$0.76 S$0.83 N/A VIVA.SI VIT SP US$490.7m S$703.2m US$0.29m S$0.41m Current shares o/s: 931.4m Free float: 33.9% Vol m 10 5 Source: Bloomberg Price performance 1M 3M 12M Absolute (%) Relative (%) Major shareholders % held Tong Jinquan 54.2 Ho Lee Group Trust 7.7 China Enterprises Limited 4.4 Analyst(s) Price Close Relative to FSSTI (RHS) Jan-16 Apr-16 Jul-16 Oct Viva Industrial Trust Rose among the thorns VIT is a Singapore-focused business park and industrial trust. Based on Bloomberg estimates, VIT is trading at 9.5% FY17 dividend yield, highest in the sub-sector. Unlike its small-cap counterparts that reported an average 13.4% yoy decline in 3Q16 DPU, VIT registered a 9.7% yoy increase in 3Q16 DPU. Its DPU growth has been driven by acquisitions and AEI at VBP. Management expects DPU growth qoq in next few quarters due to rising contribution from VBP. Risks are: i) non-renewal by McDermott, ii) expiry of rental support for UEBHbusiness park component in FY18, and iii) short land lease tenure. Highest-yielding industrial S-REIT currently VIT is a Singapore-focused business park and industrial trust. Including the proposed acquisition of 6 Chin Bee Avenue, the group has a total of nine assets with AUM of S$1.3bn and aggregate NLA of 3.3m sq ft. As business parks make up 54.2% of the group s AUM, the group has the highest concentration of business parks among the S- REITs. Based on Bloomberg estimates, VIT is trading at 9.5% FY17 dividend yield, making it the highest-yielding industrial S-REIT currently. Rose among the thorns In contrast to its small-cap counterparts that reported an average 13.4% yoy decline in 3Q16 DPU (market-cap weighted average), VIT bucked the trend and registered a 9.7% yoy increase in 3Q16 DPU. Its DPU growth has been driven by acquisitions and asset enhancement inititative (AEI) at Viva Business Park (VBP). AEI at Viva Business Park Recall that in May 15, VIT announced its plan to maximise the white space at VBP (15% of total space) and to transform the business park into a work-play-eat-shop destination in the Chai Chee neighborhood. Average passing rent for the white space is about 2x that of the industrial space. For the next few quarters, management believes there could be DPU growth qoq as 93.4% of the white space has been committed. Only 43% of the white space contributed to 3Q16 DPU, indicating room for upside. Inorganic growth with built-in stability Including the proposed acquisition of 6 Chin Bee Avenue, VIT has expanded its initial portfolio of three properties worth S$0.7bn to a total of nine assets worth S$1.3bn. The latest acquisition is expected to be slightly DPU accretive. Additionally, 76.1% of 3Q16 rental income was derived from master lease and full rental support arrangements. Nonetheless, VIT has been working to decrease its reliance on rental support. Risks I: non-renewal risk Given its high yield, we focus on downside risks. We understand from management that McDermott (top 10 client; accounted for 3.8% of the group s rental income in Sep 16) would not be renewing its lease in Jackson Square (expires in Apr 17). Downside is mitigated by rental guarantee for Jackson Square (until 2019). Additionally, VIT has partially backfilled the space and does not foresee issues in finding tenants due to Jackson Square s central location (Toa Payoh). Risks II: rental support for UEBH, short land lease tenure The rental support for UE BizHub s (UEBH) business park component expires in Nov A material gap exists between the passing rent of UEBH and implied rent under the rental support arrangement. In the worst-case scenario, management deems that rising contribution from VBP could offset the absence of income support. Also, VIT has a weighted average land lease of 35.1 years. The manager remains confident of renewing the remaining 15.3-year land lease for VBP (at end-15). YEO Zhi Bin T (65) E zhibin.yeo@cimb.com LOCK Mun Yee T (65) E munyee.lock@cimb.com Financial summary FYE Dec, S$m FY14 FY15 9MFY16 9MFY15 Gross property revenue Net property income NPI margin 66.0% 68.7% 72.5% 68.4% Distributable income Asset leverage 44.3% 38.6% 39.8% 38.8% DPS (S cts) Dividend yield 9.0% 9.3% 9.2%* 9.5%* BVPS (S cts) P/BV (x) *Annualised SOURCE: COMPANY DATA, CIMB, BLOOMBERG IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Powered by the EFA Platform

2 Rose among the thorns Company snapshot VIT is a Singapore-focused business park and industrial trust, comprising Viva Industrial Real Estate Investment Trust (VI-REIT) and Viva Industrial Business Trust (VI-BT). Including the proposed acquisition of 6 Chin Bee Avenue, the group currently has a total of nine assets with AUM of S$1.3bn and aggregate NLA of 3.3m sq ft. Management views Viva Business Park (valued at S$330m) and UE BizHub East s business park component (valued at S$335m) as the jewels in the group s crown. As business parks make up 54.2% of the group s current AUM, the group has the highest concentration of business parks among the industrial S-REITs. Post-acquisition, management expects VIT s gearing to be 39.3%. The key shareholder and sponsors of VIT are Tong Jinquan (54.2% stake), Ho Lee Group (7.7%) and Kim Seng Holdings (4.2%). The group is externally managed, with the REIT manager owned by Maxi Capital Pte Ltd (55.5% stake), Kim Seng (16.7%) and Ho Lee (27.8%). Rose among the thorns Bucking the trend Supply pressures in the form of lower portfolio occupancy and passing rents, multi-tenanted building (MTB) conversions, as well as the absence of capital distribution and manager s fees paid in units have resulted in the small-cap industrial SREITs reporting an average 13.4% yoy decline in headline 3Q16 DPU (market-cap weighted average). VIT, however, has bucked this trend and registered a 9.7% yoy increase in its 3Q16 DPU. To illustrate, VIT s 3Q16 revenue increased by 31.9% yoy or S$5.9m. 3Q16 revenue growth was driven by the acquisition of 30 Pioneer Road in 2Q16 (which accounted for 19% of the revenue growth), acquisitions of 11 Ubi Road 1 and the Home-Fix Building in 4Q15 (44% of revenue growth) and AEI at Viva Business Park (34% of revenue growth). Figure 1: Among the small-cap industrial REITs, VIT has bucked the 3Q16 trend by reporting a 9.7% yoy increase in DPU (S cts) Figure 2: 3Q16 revenue growth, by key driver (% yoy) S$0.2m, 3% S$1.1m, 19% S$2.0m, 34% S$2.6m, 44% Q15 4Q15 1Q16 2Q16 3Q16 VIT Weighted average (by mkt cap) of small-cap industrial REITs Newly-acquired 30 Pioneer Road Newly-acquired 11 Ubi Road 1 & Home-Fix Building AEI at Viva Buisness Park Others Organic driver: AEI at Viva Business Park Recall that in May 15, VIT announced its plan to maximise the white space (space allowable for mixed uses, 15% of total space) of Viva Business Park (VBP). The asset enhancement initiative (AEI) involved the conversion of unutilised areas (around 230,000 sq ft) into retail and commercial space at three 2

3 of the six blocks at VBP; and aimed to transform the business park into a workplay-eat-shop destination in the Chai Chee neighbourhood. The AEI was conducted in three phases and cost more than S$80m (including c.s$59m incurred for development charge for the change in use). Phases 1 and 2 obtained temporary occupation permit (TOP) on 11 Jan 16 and 4 May 16, respectively. Management expects Phase 3 to be completed by 4Q16. The manager has targeted S$9.8m incremental NPI from the AEI. At end-sep 16, 93.4% of the white space was committed and the majority of the amenities are due to start operations by 1Q17. The amenities can be broadly categorised as: i) sports and fitness, ii) food and beverage, as well as iii) family-oriented destinations such as a Halal-certified supermarket and learning centres for children. Anchor tenants include Decathlon (French sports retailer), True Fitness gym and Burger King (F&B chain). Interestingly, VBP has a cluster of Halal-dining options to better cater to the population catchment in the Bedok area. Retail rents for VBP range from single digit to mid-teens, with average passing rent of around S$5.50 psf pm or 2x the average passing rent for the industrial space. In comparison, the average passing rent for the industrial space is around S$2.80 psf pm. The industrial component was around 75% occupied as at end-3q16 (occupancy for the entire VBP was 73% at end-3q16). For the next few quarters, management expects DPU growth qoq as 93.4% of the white space for VBP has been committed. Meanwhile, only 43% of the white space contributed to 3Q16 DPU, indicating room for further upside. As for 9M16, VBP accounted for about 23% of the group s NPI (including rental support). Figure 3: Increasing contribution from VBP as AEI nears completion (S$m) % 75.0% Figure 4: Transformation of VBP into a work-play-eat-shop destination in the Chai Chee neighbourhood (S$m) % 75.0% % 70.2% 70.0% % 70.2% 70.0% % 65.0% % 65.0% Q15 1Q16 2Q16 3Q % - 4Q15 1Q16 2Q16 3Q % VBP gross revenue VBP occupancy VBP gross revenue VBP occupancy SOURCES: COMPANY REPORTS Inorganic growth driver: acquiring 6 Chin Bee Avenue Since IPO, VIT expanded through acquisitions, accompanied by equity fundraising exercises. Including the proposed acquisition of 6 Chin Bee Avenue, the group s has expanded its initial portfolio of three properties worth S$0.7bn to a total of nine assets worth S$1.3bn. The manager has demonstrated discipline in not exercising its right of first refusal (ROFR) on assets in the pipeline as the acquisitions would not have been DPU accretive. In the meantime, its recent acquisitions of 11 Ubi Road 1 and Home-Fix Building in 4Q15 plus the acquisition of 30 Pioneer Road in 2Q16, boosted VIT s 3Q16 DPU growth. As for 6 Chin Bee Avenue, the property is a newly-completed 5-storey ramp-up, high specifications warehouse development that caters to the food services sector. The agreed price tag was S$87.3m (7.4% discount to independent valuation of S$94.3m). The asset would be leased to Sharikat Logistics, a thirdparty logistics (3PL) and warehouse space solutions provider. The lease would be a 7-year triple-net master, contributing S$7.4m p.a. to VIT, with an option to 3

4 extend for another three years. The lease also builds in 1.5% rental escalation p.a. at the beginning of the third year and for every subsequent year of the lease term. Management expects the acquisition to be slightly DPU accretive. The manager guided that 9M16 DPU would have experienced a 0.04% uplift if the acquisition was completed on 1 Jan 16. To partly fund the acquisition, VIT issued a private placement of 60.8m new stapled securities at an issue price of S$0.74 plus 31.1m consideration units to the vendor, which raised net proceeds of S$66.5m. Figure 5: Since IPO, VIT has expanded through acquisitions SOURCES: COMPANY REPORTS Figure 6: Key milestones (S$m) Date Event % 04Nov13 Listed on Singapore Exchange Mainboard 73.0% 12Sep14 Issuance of 4.15% 4-year S$100m note 21Nov14 Completed acquisitions of Jackson Square and Jackson Design Hub at 8.0 S$111.5m 70.2% 70.0% 02Dec14 Private placement of 20m new stapled securities at S$0.78 to raise gross proceeds of S$15.6m % 05Jun15 Private placement of 80.3m new stapled securities at S$0.785 to raise gross proceeds of S$63m 66.6% 18Nov 15 Private placement of 52m new stapled securities at S$0.725 to raise 4.0 gross proceeds of S$37.7m 65.0% 24Nov15 Completed acquisitions of 11 Ubi Road 1 and Home-Fix Building at S$122.7m Dec15 Preferential offering of one new stapled security for every existing seven at S$0.715 to raise gross proceeds of S$72.3m 11Feb16 Refinanced outstanding loans maturing in 2016 and 2017 respectively % 4Q15 1Q16 2Q16 3Q16 15Apr16 Completed acquisition of 30 Pioneer Road at S$45m VBP gross revenue VBP occupancy 27Oct16 Proposed acquisition of 6 Chin Bee Avenue for S$87.3m 27Oct16 Private placement of 60.8m new stapled securities at S$0.74 to raise gross proceeds of S$66.4m VIT is the highest-yielding industrial S-REIT currently Based on Bloomberg estimates, VIT is trading at 9.5% FY17 dividend yield and 0.94x P/BV. The REIT is the highest-yielding industrial S-REIT currently (vs. the small-cap industrial REIT average of 8.6% FY17 dividend yield). Figure 7: VIT 12-month forward dividend yield % 12m fwd dividend yield 12.5 Figure 8: Viva Industrial Trust P/BV x PBV (X) sd = 1.04x sd = 11.54% Average = 10.89% Average = 0.97x sd = 10.23% sd = 0.90x Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 SOURCE: BLOOMBERG 0.80 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 SOURCE: BLOOMBERG 4

5 Figure 9: CIMB REIT/BT Overview SREIT Bloomberg Ticker Price as at 08 Jan 17 Mkt Cap (US $m) Last reported asset leverage Rec. Hospitality Ascott Residence Trust ART SP $1.16 $1, % $1.11 H 6.8% 7.1% 7.2% Ascendas Hospitality Trust ASCHT SP $0.72 $ % NA NR 7.6% 7.7% 7.6% CDL Hospitality Trust CDREIT SP $1.39 $ % $1.30 H 6.6% 6.8% 7.0% Far East Hospitality Trust FEHT SP $0.60 $ % $0.56 H 7.2% 7.0% 7.2% Frasers Hospitality Trust FHT SP $0.66 $ % NA NR 8.2% 7.9% 8.1% OUE Hospitality Trust OUEHT SP $0.69 $ % $0.70 A 6.5% 7.1% 7.3% Simple Average 35.5% % 7.3% 7.4% Industrial AIMS AMP AAREIT SP $1.34 $ % NA NR 8.5% 8.5% 8.8% Ascendas REIT AREIT SP $2.38 $4, % $2.25 H 6.5% 6.4% 6.4% Cache Logistics Trust CACHE SP $0.82 $ % $0.74 RD 9.2% 8.7% 8.3% Cambridge Industrial Trust CREIT SP $0.55 $ % $0.55 H 8.0% 7.9% 8.1% Keppel DC REIT KDCREIT SP $1.21 $ % $1.18 H 5.1% 5.7% 5.8% Mapletree Industrial Trust MINT SP $1.65 $2, % $1.68 A 6.8% 6.9% 6.9% Mapletree Logistics Trust MLT SP $1.04 $1, % $1.02 H 7.1% 7.2% 7.4% Sabana Shariah SSREIT SP $0.34 $ % NA NR 0.0% 0.0% 0.0% Soilbuild Business Space REIT SBREIT SP $0.66 $ % NA NR 9.2% 9.5% 8.9% Viva Industrial Trust VIT SP $0.76 $ % NA NR 9.3% 9.5% 10.6% Simple Average 36.1% % 7.0% 7.1% Office CapitaLand Commercial Trust CCT SP $1.54 $3, % $1.52 H 5.8% 6.1% 6.3% Frasers Commercial Trust FCOT SP $1.27 $ % $1.26 H 7.8% 7.5% 7.3% Keppel REIT KREIT SP $1.05 $2, % $1.02 H 6.4% 6.4% 6.3% OUE Commercial REIT OUECT SP $0.70 $ % $0.65 H 7.6% 7.6% 7.7% Simple Average 38.3% % 6.9% 6.9% Retail CapitaLand Mall Trust CT SP $1.97 $4, % $1.96 H 5.6% 5.5% 5.6% Frasers Centrepoint Trust FCT SP $1.96 $1, % $2.01 A 6.0% 6.0% 6.2% Mapletree Commercial Trust MCT SP $1.46 $2, % $1.45 H 5.6% 5.7% 5.9% SPH REIT SPHREIT SP $0.97 $1, % $0.95 H 5.7% 5.9% 6.0% Starhill Global REIT SGREIT SP $0.77 $1, % $0.76 H 6.8% 6.9% 7.1% Suntec REIT SUN SP $1.68 $2, % $1.54 RD 6.1% 6.2% 6.2% Simple Average 33.3% % 6.0% 6.2% Retail Ex-Sin CapitaLand Retail China Trust CRCT SP $1.41 $ % NA NR 7.2% 7.9% 7.8% Croesus Retail Trust CRT SP $0.85 $ % $0.98 A 8.1% 9.4% 9.4% Lippo Malls Indonesia Retail Trust LMRT SP $0.37 $ % $0.38 H 8.6% 9.1% 9.2% Mapletree Greater China Commercial Trust MAGIC SP $0.96 $1, % $1.13 A 7.6% 7.8% 7.9% Simple Average 37.3% % 8.5% 8.6% Healthcare First REIT FIRT SP $1.29 $ % $1.26 H 6.5% 6.5% 6.7% Parkway Life REIT PREIT SP $2.38 $1, % $2.53 A 5.1% 5.3% 5.4% RHT Health Trust RHT SP $0.92 $ % $0.89 H 8.5% 33.3% 6.9% Simple Average 29.1% % 15.0% 6.3% Simple average for SIN 35.0% % 7.7% 6.9% Last stated NAV Price / Stated NAV Target Price (DDMbased) FY16F Yield FY17F Yield FY18F Yield, BLOOMBERG Property portfolio Property portfolio details VIT currently has a total of nine assets with AUM of S$1.3bn and aggregate NLA of 3.3m sq ft (including the proposed acquisition of 6 Chin Bee Avenue). Management views Viva Business Park (valued at S$330m) and UE BizHub East s business park component (valued at S$335m) as the jewels in the group s crown. Business parks make up 54.2% of the group s current AUM, and the REIT has the highest concentration of business parks among the industrial S-REITs. In Figure 10, we provide details on VIT s properties. UE BizHub East s (UEBH) business park component and VBP are the largest contributors to VIT s distributable cash flow, accounting for estimated 34% and 23%, respectively, of the group s 9M16 NPI (including rental support). 5

6 Figure 10: Property details # Property Property type Valuation (S$m) FY15 gross revenue (S$m) 1 UE BizHub EAST - business park component 2 UE BizHub EAST - GFA (sq ft) Building age (yr) Remaining land lease (yr) Business park , % FY15 occupancy (%) Hotel , % hotel component 3 Viva Business Park Business park ,524, % 4 Mauser Singapore Logsitics , % 5 Jackson Square Light industrial , % 6 Jackson Design Hub Light industrial , % 7 11 Ubi Road 1 Light industrial , % 8 Home-Fix Building Light industrial , % 9 30 Pioneer Road Logistics 45.0 na 281, na 10 6 Chin Bee Avenue Logistics 87.3 na 324, na THE ACQUISITION OF 30 PIONEER ROAD WAS COMPLETED ON 15 APR 2016 WHILE THE ACQUISITION OF 6 CHIN BEE AVENUE HAS NOT BEEN COMPLETED AT THE TIME OF WRITING Among the industrial sub-asset types such as warehouses and factories, we are most positive on business parks. Given the minimal supply post-2016 and the high pre-commitment levels, we believe that business park rents and capital values are supported by Singapore s structural shift towards higher-value activities. That said, we foresee some near-term supply pressure after completions peaked in 2016 (refer to Appendix: Business park outlook). We note that for an area zoned for business park, a maximum of 15% of GFA is allowed for white uses, which may include retail shops, offices and restaurants. As for a business park zoned as business park white, more than 15% and up to 40% of the development s overall GFA is allowed for white uses. The land at UEBH is zoned for business park white development, while the land at VBP is zoned for business park. As at 30 Sep 16, VIT s portfolio has a weighted average lease expiry (WALE) of 3.3 years (by rental income), with portfolio occupancy of 88.6% (up from 80.8% at 30 Sep 15). VIT has a diverse set of tenants and sub-tenants from trade sectors, including Cisco System (global IT company), Meiban Group (local precision engineering company), Decathalon (French sporting goods) and NTUC Fair Price (local grocery retailer). Please refer to Figure 20: top 10 customers. About 44% of the group s tenants are from the IT sector and 18.4% from the engineering sector. Interestingly, VIT has leased out data centre space at VBP (on a shell and core basis) to 1-Net, a government linked data centre operator. 1-Net accounted for around 5% of rental income in Sep 16. Figure 11: Asset type, by valuation (post-acquisition of 6 Chin Bee Avenue) Figure 12: Tenant type, by gross rental income (30 Sep 16) Logistics, 13.8% GLC, 4.7% Business Park, 54.2% SME, 36.9% MNC, 58.4% Light Industrial, 19.5% Hotel, 12.5% 6

7 Rental income has downside protection We note that 76.1% of VIT s 3Q16 rental income was derived from master lease and full rental support arrangements, such as the rental support for UEBH s business park component and rental guarantee for Jackson Square. That said, VIT s reliance on rental support for UEBH s business park component has been decreasing owing to new tenancies at UEBH s business park component, as well as contribution from new acquisitions (refer to Figure 14: Rental support has been narrowing). Five of the group s nine properties are on master leases with embedded rental escalation clauses. They are i) UEBH s hotel component, ii) Mauser Singapore, iii) Jackson Design Hub, iv) Home-Fix Building and lastly, v) 6 Chin Bee Avenue. The vendor for UEBH s business park component has agreed to provide net rental support of up to S$25.35m p.a for five years (until Nov 2018), along with 5% rental escalations in the third and fifth years. The vendor for Jackson Square has also provided a 5-year guarantee (until Nov 2019), based on an amount that approximates the current total gross rental collection from the underlying tenants. Figure 13: Downside risk offset by master lease and full rental support arrangements Figure 14: Rental support has been narrowing; contributed less than 16% of rental income in 3Q % 80.0% 100.0% 80.0% 29.1% 23.4% 21.0% 17.8% 17.4% 15.9% 60.0% 70.4% 72.0% 77.0% 77.9% 76.9% 76.1% 60.0% 20.5% 21.0% 21.7% 29.1% 32.2% 31.9% 40.0% 40.0% 20.0% 29.6% 28.0% 23.0% 22.1% 23.1% 23.9% 20.0% 50.3% 55.6% 57.3% 53.1% 50.4% 52.2% 0.0% FY13 FY14 FY15 1QFY16 2QFY16 3QFY16 Rental income from properties with full downside protection arrangements Rental income from properties without full downside protection arrangements 0.0% FY13 FY14 FY15 1QFY16 2QFY16 3QFY16 Retnal income from multi-tenants Master lease income Rental support Capital management As at 30 Sep 16, VIT had total borrowings of S$488m, with all-in borrowing costs of 3.9%. Gearing stood at 39.8%. Post-acquisition, management expects gearing to improve to 39.3%. Around 86.1% of VIT s borrowings were hedged against interest rate. In Feb 16, VIT refinanced outstanding loans maturing in FY16 and FY17, with additional credit facilities and extended tenors. As such, VIT has no major refinancing requirements until FY18, when its 4.15% S$100m 4-year note matures in Sep 18. 7

8 Figure 15: Balance sheet metrics As at 30 Sep 2016 Total Borrowings S$488 million Gearing Ratio (Total Borrowings over Total Assets) 39.8% All-in Borrowing Cost 3.9% Weighted Average Debt Maturity years Interest Rate Exposure Fixed 86.1% Interest Cover 4.18 times Figure 16: Debt maturity profile EXCLUDES THE REVOLVING CREDIT FACILITY OF S$50 MILLION Shareholder & management The key shareholders and sponsors The key shareholders and sponsors of VIT are: 1) Tong Jinquan, founder of the Summit Group (50.5% stake). Mr Tong has over 20 years of experience in property investment, development and management. He founded Summit Group in 1994, which held total assets of approximately Rmb55bn as at end-15. 2) Ho Lee Group (invested through Ho Lee Group Trust, 7.7% stake). Established in 1972, Ho Lee Group is a diversified company in construction and construction-related businesses, as well as property development. Its other businesses include steel fabrication, equipment and machinery, as well as aluminium manufacturing through its SGX-listed subsidiary, LH Group Limited. 3) Kim Seng Holdings Pte. Ltd (invested through China Enterprises Ltd, 4.2% stake). Kim Seng Holdings is the investment vehicle controlled by Mr Tan Kim Seng and his family. Mr Tan was the founder and former Executive Chairman of KS Energy, an oil services company listed on the SGX. KSH also holds a 6.7% stake in Heeton Holdings, a small-cap property developer listed on the SGX. The REIT manager VIT is externally managed, with the REIT manager (Viva Investment Management Pte Ltd) owned by Maxi Capital Pte Ltd (55.5% stake), Kim Seng (16.7%) and Ho Lee (27.8%). The shareholders of Maxi Capital comprise Shanghai Summit and the key executives of the manager. Most of its board of directors are independent. The CEO of the REIT manager, Mr Wilson Ang Poh Seng, is an experienced professional in the Singapore industrial property sector. In 2006, he co-founded and became CEO of Cambridge Industrial Trust (CREIT SP, HOLD), the first industrial REIT manager in Singapore. Before that, he spent more than 13 years with Colliers International (Singapore) as head of the industrial division. The Head of Investor Relations & Capital Markets, Mr Frank Ng Tze Wei, works with the CEO and members of the management team to formulate strategic plans for VIT. He was key in the listing of VIT on the SGX. Prior to joining the REIT manager, Mr Ng was lead economist at the Monetary Authority of Singapore (MAS). The Head of Asset Management, Mr Kendrick Kwek Chin Liang, has over 26 years of real estate experience in property and asset management in Singapore 8

9 and China. He has extensive experience in managing a wide range of real estate portfolios. Prior to joining the REIT manager in May 16, Mr Kwek was Senior Director of Tishman Speyer, where he was the Head of Property Management in China. Figure 17: VIT sponsors & strategic partners Figure 18: REIT manager structure Tong Jinquan Ho Lee Group Trust ( HLGT ) China Enterprises Limited ( CEL ) 1 Other Stapled Securityholders 54.2% 2 7.7% 2 4.2% % 2 Maxi Capital Pte. Ltd Sponsor: Kim Seng Holdings Pte. Ltd. Sponsor: Ho Lee Group Pte. Ltd. 55.5% 16.7% 27.8% VIT 3 Stapling VI-REIT Deed VI-BT 4 Viva Investment Management Pte. Ltd. 100% 1. Investment holding company of sponsor Kim Seng Holdings 2. Shareholdings as at 10 October stapled security comprises 1 unit in VI-REIT and 1 unit in VI-BT. 4. VI-BT will remain dormant and exist primarily as a "lessee of last resort". VITM (VI-REIT Manager) VAM (VI-BT Trustee Manager) Risks Non-renewal risk As at 30 Sep 16, about 16.1% of VIT s gross rental income is due for renewal in We understand that US oil services company, McDermott Asia Pacific will not be renewing its lease on Jackson Square (expires in Apr 17). The nonrenewal follows the move by oil services MNCs such as Technip, Subsea 7 and Saipem to relocate their Southeast Asia headquarters from Singapore to Kuala Lumpur. The MNCs want to take advantage of the lower cost base and more importantly, to be closer to strategic clients such as Petronas (Malaysia s stateowned oil & gas company). McDermott accounted for around 3.8% of the group s rental income in Sep 16; and occupies about 109,500 sq ft in Jackson Square (or 23% of its NLA). We understand that a multinational electronics contract manufacturing company has taken up a portion of the McDermott space; and that the signing rent was on par with McDermott s. In addition, Jackson Square is located in Toa Payoh, the central region of Singapore. Hence, the manager does not foresee any issues in backfilling the vacant space. Lastly, Jackson Square has a rental guarantee in place that would protect VIT from any drop in rental income until On MTB conversions risks, we note that the Mauser Singapore master lease will expire in 2019, with an option to renew for another five years. 9

10 Figure 19: Lease expiry, by gross rental income (30 Sep 16) Figure 20: Top 10 customers accounted for 43.2% of monthly committed rental income in Sep % 35.0% 30.0% 35.0% 29.9% 8.0% 7.0% 6.0% 5.0% 6.9% 5.7% 5.2% 5.0% 25.0% 4.0% 4.1% 3.8% 3.6% 3.6% 20.0% 15.0% 16.1% 18.7% 3.0% 2.0% 1.0% 2.9% 2.4% 10.0% 0.0% 5.0% 0.0% 0.3% FY16 FY17 FY18 FY19 FY20 & beyond Rental support for UEBH expires in FY18 The rental support for UEBH s business park component expires in Nov In 9M16, UEBH s business park component contributed around S$12m to NPI, while rental support for UEBH was around S$8m. We understand from management that the average passing rent of c.s$4.50 psf pm and occupancy of c.90% underpinned the S$12m NPI contribution. Including the rental support, this implies that the average passing rent for UEBH s business park component is around S$5.90 psf pm (vs. spot rent of S$5.60 for comparable properties in Changi Business Park) and occupancy rate is 95%. This also means that VIT needs to increase UEBH s passing rent by 30% in two years (or by FY18) and raise occupancy by 5% to achieve the desired stabilised state. In mitigation, the completion of the new Downtown Line in 3Q17 would increase the accessibility of UEBH, and enable VIT to negotiate for higher rents, closer to the spot rate of S$5.60 when it renews leases in Additionally, some of the shortfall could be partially offset by an additional S$1m p.a. in NPI from UEBH s hotel component (function of the 10-year master lease agreement that started in Nov 13). In the worst-case scenario of VIT being unable to bridge the rental gap of S$4.50 and S$5.90, the manager deems that increasing contribution from VBP should offset the absence of income support for UEBH s business park component. This could result in a plateau for DPU profile, rather than an increasing one (refer to Figure 1). Short land lease tenure VIT has a weighted average land lease (by valuation) of 35.1 years. Of note, VBP has a remaining land lease of 15.3 years (as at end-15). The implication of shorter land tenure is that it could restrict industrial end-users longer-term business planning, making the space less attractive to them. In addition, we understand that the valuers are likely to treat properties with land lease tenure of less than 10 years as depreciating assets. This could spell NAV erosion. The manager remains confident that the land lease for VBP will be renewed. The renewal of land lease depends on the Urban Redevelopment Authority s (URA) master plan zoning, as well as the site owner s investment commitment. In the Master Plan 2008, VBP was rezoned from High-Tech Industrial to Business Park. The rezoning took into account the site s location within mature residential estates and the shifting profile of businesses that are likely to locate there. In addition, VIT has invested more than S$80m in VBP s AEI to utilise the white component of the development, converting industrial space into retail and office space. 10

11 Hence, the manager remains confident that the land lease for VBP will be renewed. It believes that there is potential upside to VBP s value from the land lease being extended. Appendix: Business park outlook We deem business parks as the pinnacle of industrial space sophistication and a real estate proxy for Singapore s shift towards higher value-added activities. Business park buildings are located in government-identified zones called Business Parks, which accommodate various amenities such as food and beverage outlets, convenience stores and childcare centres. The business park buildings are high-rise, multi-tenanted buildings located in a landscaped environment. The concentration of companies from the same sector allow for greater economies of scale from shared infrastructure. As at end-3q16, Singapore had a total of 23m sq ft of business park space. After a sizeable 2.37m sq ft of completions in 9M16 (prominent completions included Ascent at the Singapore Science Park and MBC II), supply in the pipeline is expected to stay low in According to the JTC, around 0.28m sq ft of supply (assuming 80% efficiency) or 1.2% of the existing stock is expected to be completed between now to There is notable incoming supply in the form of purpose-built business park being developed by BP-Vista, a JV between Boustead Singapore and a Middle-Eastern sovereign wealth fund, in 4Q16. As a result of the supply peak in 2016, we expect island-wide occupancy to fall to 80.2% in 2016 (2015: 84.1%). However, assuming a moving 5-year average net absorption, occupancy is expected to recover to 90.2% in Furthermore, we understand that the developments under construction are 100% pre-committed. Amid limited supply and expected recovery of the office market, we expect business park rents to strengthen in 2H17/2018. As at end-3q16, business park median monthly rent stood at S$4.25 psf pm, an improvement of c.5% from end Figure 21: Annual supply, net absorption and occupancy of business parks island-wide Figure 22: Average rents for business parks have been stable (S$ psf pm) yr ave. supply: 104k sq m yr fwd ave. 85 supply: 82k sq m Annual supply ('000 sq m) Annual demand ('000 sq m) Occupancy (%, RHS) SOURCES: CIMB, URA Business Park (city fringe) Business Park (Rest of the Island) SOURCES: CIMB, CBRE 11

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