• S$1.0m cash payment
• S$1.7m add. security deposits
• FV increases to S$0.83

Key Terms of Settlement With JIPL

Viva Industrial Trust (VIT) announced that a settlement agreement has been reached with Jackson International Private Limited (JIPL) and Mr. Tan Phong Guan, JIPL’s director and shareholder. Key terms of the agreement include a S$1.0m cash payment (“compromise amount”) to the REIT Trustee on top of the Rental Support Bank Guarantee of S$3.9m, and additional security deposits of S$1.7m in relation to the existing leases at Jackson Square (JS) taken up by JIPL subsidiaries.

Recall that three JS tenants are subsidiaries of JIPL; in Mar 2017, they contributed 19% of JS’s gross rental collection and occupied 24% of the space. The settlement agreement is a full and final settlement of all existing claims arising from the termination of the rental support agreement.

Changing Our Occupancy Assumptions for Jackson Square

Given the additional security deposits of S$1.7m, we estimate that VIT now has around 12 months’ worth of security deposits for the leases taken up JIPL’s subsidiaries and we change our occupancy assumptions for JS accordingly. Our previous assumptions for JS occupancy were as follows: ~55% occupancy from 2Q17 to 4Q17, ~65% for FY18 and ~75% for FY19. Our assumptions are now 74% to 84% occupancy from 2Q17 to 4Q17, ~78% for FY18 and ~85% for FY19. Note that total occupancy at JS as at end-Mar, which included McDermott, was 91%.

Re-iterate BUY; FY17F Yield of 9.6%

After the adjustments, our fair value increases from S$0.825 to S$0.83. As mentioned in our previous reports, we expect the termination of the rental support agreement at JS to have little to no impact on FY17 DPU. After taking into account the settlement agreement and our new occupancy assumptions, we expect a shortfall of around S$0.7m in what would have been the JIPL rental support due in FY18 as well as a S$1.3m shortfall in FY19.

Nonetheless, we look forward to improvements in underlying rental income at VBP and UEBH in the coming years and find current price level attractive. VIT currently enjoys an FY17F yield of 9.6%. Reiterate BUY with a fair value of S$0.83.

Source: OCBC Research - 23 May 2017