• 31 Aug EGM and Scheme Meeting
• Terms are “principal-positive”
• Accept the offer

2Q Results Within Expectations

Viva Industrial Trust’s (VIT) 2Q results were within expectations. Gross revenue increased 3.9% YoY to S$28.7m. Including 50% of the distributable income attributable to the net income tax credit, the distribution declared was 3.1% higher YoY at S$18.6m.

DPU increased 2.2% to 1.902 S cents or 28.0% of our full-year forecast which is within our expectations. Over 44.6% of the leases due for renewal this year have been renewed in 1H18 with a positive rental reversion of 2.3%.

Each VIT Unit for 1.6 New ESR-REIT Units and 9.6 S Cents in Cash

Under the terms of the merger, each VIT unit can be exchanged for 9.6 S cents in cash and 1.6 new (post-merger) ESR-REIT units. Using our S$0.90 fair value for stand-alone VIT and the S$0.58 Bloomberg consensus fair value for stand-alone ESR-REIT, we estimate that the fair value of the post-merger ESR-REIT entity should lie at ~S$0.52 per unit (and above, assuming that there are positive synergies to be gained from the merger).

Overall, our estimate implies that 1 VIT unit can be traded for an aggregate value of at least S$0.934 (including the 9.6 S cents in cash). Against VIT’s S$0.90 closing price as at 13 Aug, we see these as “principal-positive” terms for VIT.

Key Benefits to the Merger

We see three main benefits to the merger. First, the asset diversification of the enlarged portfolio would mean that the merged entity is less affected by VIT’s fall-off in income support at the end of this year. Second, there is the potential to refinance at lower costs and access to a greater pool of financing options. Third, higher liquidity and there is the possible inclusion in the investible universe for more institutional funds.

EGM and Scheme Meeting on 31 Aug

For the merger to go through, approvals need to be sought from both ESR-REIT’s and VIT’s unitholders. Note that VIT’s EGM and Scheme Meeting will be held on 31 Aug 2018 at the Stephen Riady Auditorium at NTUC Centre. See appendix for more details. Given the favourable terms, we see it in VIT unitholders’ benefit to accept the offer

Source: OCBC Research - 14 Aug 2018