Press Release

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Financials

Maiden DPU contribution

VIT’s 4QFY13 DPU (4 Nov-31 Dec) was broadly in line with management and our forecasts. We tweak our FY15-16 DPU forecasts but our DDM-based target price (discounted at 9.1%) remains unchanged. We maintain our Add rating as VIT’s FY14 yield remains attractive at 8.7% against its peers’ average of 7.8%. Potential share price catalysts include surprise in earnings delivery and execution.

Results highlight

VIT’s 4QFY13 DPU (4 Nov-31 Dec) was in line with expectation, at 30% of our half-year forecast. Operationally, we are seeing improvements in UE BizHub East (UEBH) as its business park occupancy improved from 64% at IPO to 84% as at end-2013. Occupancy at Technopark@Chai Chee (TPCC) remains unchanged at c.61%. We estimate operational NPI yield to be around 5.2%.

2014 to remain stable

Leases for about 21% of its underlying rental income, mostly within TPCC, is set to expire in FY14. We expect TPCC to garner a high retention rate but minimal rental reversion in 2014, given the sticky tenants but older asset. Any additional growth in VIT’s underlying rental income should come from UEBH as it leases out the remaining 16% of space. The impact on DPUs, however, should be minimal as both buildings are under rental support.

TPCC AEIs in the planning

VIT is planning an AEI for TPCC, subject to further feasibility studies, tenant commitments, and regulatory and Board approval. Recall that around 15% of the GFA (229,000 sq ft) has been zoned by HDB as “white” space and is not currently utilised. The AEI is likely to involve the conversion of the existing carpark and ground floor units into “white” space to accommodate F&B and hypermarts. Demand for such facilities is supported by the existing tenants and the densely-populated neighbourhood. We expect disruptions to the overall occupancies to be minimal as the affected areas are carparks, and selected ground floor tenants will be moving to other units currently unoccupied. Risks to the AEI are incremental gearing (currently at 38.8%) and the short remaining lease for TPCC (17 years). The AEI should be completed in 1-2 years. We have yet to factor this into our model as we await further details.

We are “Neutral” on VIT despite its 8.8% dividend yield for 2014 and 9% for 2015 due to the following reasons:

• the average occupancy rate for its key properties (UE Bizhub East) and Technopark @ Chai Chee is only in the 60-70% range, hence requiring income support from United Engineers (for 5 years) and Capitaland (for 2 years) to meet the projected yields;
  
• excluding the income support, the actual yield would be 6+%, which is about in line with that of more established industrial REITs such as AREIT (6+%) and Mapletree Industrial Trust (7%) and inferior to that of Cache Logistics (7+%), Cambridge Industrial (7+%) and Soilbuild Biz Space REIT (8+%);
  
• VIT’s gearing of about 40% is amongst the highest in the sector, making it difficult (or potentially more fund raising ahead) for future acquisitions;
  
• VIT’s high gearing would also make it vulnerable to the potentially higher interest rate environment amidst fears of “tapering” of bond purchases by the US federal reserve next year;
  
• compared to the existing industrial REITs in the market, VIT’s portfolio of only 3 properties has the highest concentration risk;
  
• while VIT has right of first refusal for 6 properties in Singapore, Korea and China, its high yield of 9% makes accretive acquisitions difficult to achieve; and
  
• Soilbuild Biz Space REIT has not done well post listing (despite offering an attractive yield of 8+%), having tanked from its IPO price of 78 cents to a low of 69 cents at the end of Aug’13 before rebounding to 75 cents currently.