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Four Things To Note For The Upcoming IPO of Viva Industrial Trust

Singapore skyline 1In the past seven months, there has been a slew of Real Estate Investment Trusts and stapled securities (comprising of a REIT and a business trust that come in a pair) that have been listed on our local stock exchanges. It started with the Initial Public Offering of Mapletree Greater China Commercial Trust’s (SGX: RW0U) in March.

Since then, we have seen SPH REIT (SGX: SK6U), OUE Hospitality Trust (SGX: SK7), and Soilbuild Business Space REIT (SGX: SV3U) also float on the market.

These REITs and stapled securities, with the exception of SPH REIT, have not exactly been profitable for investors as shown in the table below.

Trust Listing   Date Offering   Price Price on   15 Oct 2013 Price   Change (%)
MGCCT 7 March 2013 S$0.93 S$0.89 -4.3%
SPH REIT 24 July 2013 S$0.90 S$0.975 8.3%
OUE Hospitality Trust 25 July 2013 S$0.88 S$0.875 -0.6%
Soilbuild Business Space REIT 16 Aug 2013 S$0.78 S$0.735 -5.8%

Source: SGX.com

Nonetheless, investors’ relative indifference to that group of securities since their respective listing dates, in addition to a lukewarm market where the Straits Times Index (SGX: ^STI) has fallen by close to 4% over the past six months, has not dampened the supply of new REIT-listings.

On Monday, Channel NewsAsia reported that Viva Industrial Trust, a stapled security comprising of Viva Industrial Real Estate Investment Trust and Viva Industrial Business Trust, had just filed its preliminary prospectus with the Monetary Authority of Singapore.

IPOs, contrary to popular belief, aren’t necessarily a ‘sure-win’ opportunity for investors. Because of that, prospective investors should scrutinise the prospectus of securities that are about to be publicly listed.

While no date’s being set yet for Viva Industrial Trust’s IPO, here are some quick facts about its listing from the preliminary prospectus.

1) IPO Details

There will be 594m units of the trust outstanding immediately after the offering. Around 212m units would be sold in the listing, with about 192m offered to institutional investors. The remaining 21m will be available to retail investors.

A cornerstone investor, Chinese property tycoon Tong Jin Quan, has agreed to subscribe for 256m units in the IPO and would own around 43% of the trust after its listing.

The offer price is S$0.78 per unit.

2) Viva Industrial Trust’s property portfolio

The trust’s initial portfolio would be made up of three properties: UE BizHub EAST (comprising of two components; a business park, and a hotel), Technopark @ Chai Chee, and Mauser Singapore.

These properties are valued at S$743m and would be purchased by the trust for S$739m. The table below highlights some other details of these properties:

Property UE BizHub EAST Business Park Component UE BizHub EAST Hotel Component Technopark @ Chai Chee Mauser Singapore
Property   Type Business Park Hotel Business Park Logistics
Valuation S$381.5m S$138.5m S$195m S$28m
Purchase   Price S$380m S$138m S$193m S$28m
Land   Area (square feet) 312,164 617,915 107,639
Gross   Floor Area (sq ft) 611,471 172,532 1,524,685 107,566
Net   Lettable Area (sq ft) 498,510 172,532 1,127,015 107,568
Land   Lease Expiry 31 Jan 2068 31 Jan 2068 31 Mar 2013 18 Jul 2066
Weighted   Average Lease Expiry (WALE) 5 years 5 years 1.5 years 6 years

Source: Viva Industrial Trust’s Initial Prospectus

3) Important Financial Numbers

Here are some balance sheet numbers and forecasted income statement figures for the trust, appearing as if the IPO was completed on 1 July 2013.

Non-Current   Assets S$743m
Current   Assets S$10.3m
Non-Current   Liabilities S$265.8m
Current   Liabilities S$46.7m
Net   Asset Value (NAV) S$440.8m
Number   of Units in the Trust 594m
NAV per   unit S$0.74
Price-to-Book   based on Offering Price 1.05

Source: Viva Industrial Trust’s Initial Prospectus

1 Jul 2013   to 31 Dec 2013 12   months ended 31 Dec 2014 12   months ended 31 Dec 2015
Gross   Revenue S$27.9m S$58.2m S$61.6m
Net   Property Income S$18m S$38.1m S$40.8m
Distributable   Income S$20.4m S$41.3m S$42.8m
Forecasted   Distribution Per Unit (DPU) 3.42 cents 6.87 cents 7.03 cents
Annualised   Distribution Yield 8.71% 8.81% 9.02%
Forecasted   DPU without rental support 2.23 cents 4.79 cents 5.19 cents
Annualised   DPU without rental support 5.68% 6.14% 6.65%

Source: Viva Industrial Trust’s Initial Prospectus

Even though the trust has a NAV of S$441m, it should be noted that at the date of listing, the trust will have a high gearing of 41% due to its total borrowings of S$308m.

These loans comprise of a mixture of a revolving credit facility and debt which matures in three-to-four years. The loans carry floating interest rates, with the former group’s interest at 2.05% over the Singapore Swap Offer Rate (the SOR represents the average cost of funds used by banks in Singapore for commercial lending). The latter group carries interest of 2.15% over the SOR.

Should interest rates spike, interest expenses for the trust’s loans will balloon accordingly. In addition, the trust’s high leverage exposes its investors to larger financial risks. That is something prospective investors should be aware of.

In the income statement snippet, sharp-eyed folks might notice the “DPU without rental support” figure. In the listing, the trust has had various arrangements with vendors of two of its properties – UE BizHub EAST and Technopark @ Chaichee – to provide rental support.

In essence, the arrangements are for the vendors to pay the trust a certain amount of money to enable the latter to hit its rent-revenue-targets for a period of two-to-five years.

There’s a chance that the rental revenues received from these properties will fall once the rental support agreements end; investors will have to depend on the trust’s manager’s ability to raise rents during the support-agreement period itself to prevent a fall in rental revenues once the arrangements end.

In addition, while the forecasted distribution yields looks great, especially when compared to the STI’s dividend yield of around 2.7%, investors should note that forecasts are not iron-clad. We have already seen cases where locally-listed trusts fall short of their forecasts.

4) Reasons for investing, according to the prospectus

Viva Industrial Trust is aptly-named for its portfolio of local industrial properties. According to the prospectus, the industrial sector in Singapore “leads recent market recovery in rental and price gains compared to office and retail sectors.”

In addition, industrial properties here “have demonstrated resilience throughout economic cycles, enjoying healthy annual occupancy rates ranging between 86.7% and 93.4% in the past decade.”

Those are perhaps strong endorsements of the trust’s strong industrial bent in its property portfolio. But it would still serve prospective investors well to consider the economic characteristics of the properties in the trust’s portfolio.

Foolish Bottom Line

This is just a quick-guide to Viva Industrial Trust’s IPO. There’s plenty more to learn as the prospectus is a mammoth 697-page document. Perhaps, the length of the prospectus is itself a reminder to investors that there are a multitude of factors to consider when making an IPO-related investment.

I’ll sign off with some words from Benjamin Graham, found in his seminal investing-text The Intelligent Investor, that makes for great food-for-thought and helps sum up my thoughts regarding IPOs (emphasis his):

It might seem ill-advised to attempt any broad statements about new issues as a class, since they cover the widest possible range of quality and attractiveness… [But] our one recommendation is that all investors should be wary of new issues – which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased.

There are two reasons for this double caveat. The first is that new issues have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under “favourable market conditions” – which means favourable for the seller and consequently less favourable for the buyer.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.