3 Things to Know About This Trust With an 8% Yield

Viva Industrial Trust (SGX:T8B) is a stapled security trust that invests primarily in business parks and industrial real estate in Singapore. The trust currently has a portfolio consisting of nine properties around the island.

With a distribution yield of 8.35% (at the time of writing), the trust also has one of the most attractive yields in the Singapore REIT market. As such, I thought it might be interesting to take a closer look at some of the business fundamentals of the trust to find out if it can make a good investment. Here is what I found out from its 2017 results.

Improved financial performance

Source: Viva Industrial Trust 2017 Results Presentation

2017 was a good year for the trust. Gross revenue and net property income increased 17.4% and 19.5% resepectively. This was due to revenue contribution from acquisitions, along with an improved performance from its existing portfolio.

The trust, consequently, managed to increase its distributable income and distributions per security by 21% and 7.4% respectively.

Debt capital management

Source: Viva Industrial Trust 2017 Results Presentation

As we can see from the above figure, Viva Industrial Trust had total borrowings of S$525 million and a gearing ratio of 39.8%, as at 31 December 2017. It is worth noting that despite its gearing being below the 45% regulatory cap, it still has one of the highest gearing ratios among stapled trusts and REITs in Singapore. As a point of comparison, similar trusts such as Mapletree Industrial Trust (SGX: ME8U) and Frasers Logistics and Industrial Trust (SGX: BUOU) have gearing ratios of 33.8% and 29.3% respectively.

The high gearing ratio may limit the trust’s ability to expand its portfolio through debt-funded acquisition in the future. Furthermore, the trust has a relatively low interest cover of 4.6 times. The interest cover is the net property income divided by its interest expenses. A low interest cover means the REIT may struggle to meet its debt obligations if its profitability decreases.

Portfolio summary

Source: Viva Industrial Trust 2017 Results Presentation

Finally, the portfolio summary provides investors with information on how sustainable the trust’s rental income stream is.

There are two things to highlight from the above table.

Firstly, Viva Industrial Trust’s weighted average lease expiry (WALE) dropped from 3.1 years to 2.6 years. The WALE is the average length of time until the current tenant contract expires. The longer the WALE, the more predictable and secure the trust’s income stream.

Secondly, the portfolio had an average land lease of 33.7 years. This is a relatively short time frame and the trust will have to fork out additional capital to increase the land tenures when the lease expires.

The Foolish bottom line

Based on its 2017 financial year results, we can see that Viva Industrial Trust has both good and bad aspects of its business. On the positive side, the trust has demonstrated increasing profitability due to the growth of its revenue and distribution to unitholders.

However, on the flip side, it has a fairly stretched balance sheet. In the short-term, I expect the trust to be able fulfill its debt obligations but its high gearing ratio might limit its ability to make yield-accretive acquisitions. Furthermore, the portfolio has fairly short land tenures. Because of that, it may need to make additional payments in the future to renew the land tenure contracts of its properties.

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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 Jeremy Chia owns units in Frasers Logistics and Industrial Trust.