• Liq. affects JS rental support
• Bank guarantee of S$3.87m
• Minimal impact on FV

Jackson International Files for Liquidation

Viva Industrial Trust (VIT) announced on Sunday night that Jackson International Private Limited (JIPL), which provides rental income support for VIT’s Jackson Square (JS), has filed for liquidation. JIPL agreed in Nov 2014 to guarantee ~S$11.6m/year in gross rental income for five years. Under the arrangement, JIPL tops up the difference between what is contributed by tenants at JS and this guaranteed amount. The amount of rental support provided by JIPL was S$2.6m in 2015 and S$1.5m in 2016. Gross revenue from Jackson Square (i.e. without rental support from JIPL) was S$9.0m in 2015 and S$10.0m in 2016.

Protection in FY17 From Rental Support Bank Guarantee

We do not expect this issue to have a material impact on the financials or distributions for FY17, primarily due to the Rental Support Bank Guarantee of ~S$3.87m. The REIT Trustee is entitled to call upon the bank guarantee in the event that JIPL fails to pay what is required to reach the rental support amount. Nonetheless, we note that three of the tenants of JS are subsidiaries of JIPL; in March 2017, they contributed 19% of JS’s gross rental collection.

Impact of Liquidation in FY18 and FY19 Minimal

We had previously projected S$2.4m and S$0.9m in rental support for Jackson Square in FY18 and FY19. Now, in light of potential occupancy losses, we expect a shortfall of S$4.4m in FY18 and S$0.9m in FY19 from the guaranteed amount respectively. These shortfall projections are sensitive to occupancy assumptions at JS (see appendix). To arrive at our figures, we have adopted what we consider conservative assumptions: ~55% occupancy for JS from 2Q17 to 4Q17, ~65% for FY18 and ~75% for FY19.

All in all, the impact of JS’s lack of rental support and compressed NPI margins in FY18 and FY19 appears to be minimal – our fair value drops from S$0.80 to S$0.795 after the adjustments. Since Sunday’s news, VIT’s price has fallen 3.1% in two days, a decline we deem out of proportion with the financial impact of JIPL’s liquidation. We re-iterate BUY on VIT with a fair value of S$0.795.

Source: OCBC Research - 26 Apr 2017