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Soilbuild REIT: A nibble.

Monday, September 15, 2014

I blogged about Soilbuild REIT slightly more than a year ago. It did badly during its IPO and I said that, already having a huge exposure to industrial properties S-REITs then, I was not interested even as its unit price declined to 70c.

At the time, I also told a reader that if the REIT's unit price should decline so much as to offer a 10% distribution yield, I would initiate a long position even with my already large exposure to industrial properties S-REITs. That didn't happen.


Since then, the REIT's unit price has recovered thanks, to a large degree, to Chinese billionaire Tong Jin Quan who bought into the REIT. The more sanguine attitude Mr. Market has towards REITs in recent months probably has a large part to play in the price recovery too.

Of course, since then, my exposure to industrial properties S-REITs has also reduced by quite a bit, largely from the reduction of exposure to Sabana REIT. With my portfolio's much lighter weighting in industrial properties, I revisited Soilbuild REIT.

At almost 80c a unit, the estimated distribution yield is 7.5%, annualising a quarterly DPU of 1.5c. Although this is not enough for me to unlock my war chest, I decided to initiate a smallish long position which gives me an incentive to continue monitoring this REIT and to possibly make a bigger investment in future.


The following is taken from the REIT's presentation slides dated 29 July 2014:

Gearing: 30.3% (Will increase to 32% after acquiring 20 Kian Teck Lane.).

Average all in interest cost: 3.08% (95% hedged).

Interest cover ratio: 5.4x.

NAV/unit: 80c.

Portfolio remaining land lease: 49 years.

Occupancy: 98.5%

Two things that investors in Soilbuild REIT should keep an eye on are:

1. 32% ($95m) of debt is maturing in 2015.

2. 29.2% (accounting for 22.4% of rental income) of leases are expiring in 2015.

I do not think that the REIT will have trouble refinancing its debt. However, the concern would be the cost of debt. It is unlikely that the cost of debt would be lower. If cost of debt were to increase by just 1% for debt maturing in 2015, distributable income would see a reduction of some 4%, everything else remaining equal.

For leases expiring in 2015, it would be realistic to expect that not all would be renewed. Not all the expiring leases in 2014 were renewed. If the REIT should be unable to find new tenants, expect occupancy to decline. The supply of industrial spaces in Singapore is not as tight as it once was.


Going back to the concern of a possibly higher cost of debt, if risk free rates were to increase by 1%, Mr. Market could demand a yield of 8.5% (from the current 7.5%) from Soilbuild REIT. In such an instance, unit price would have to fall to 70.5c to meet such an expectation, all else remaining equal. We have to be aware that this is a possible downside and a very real possibility too.

Like with any other investment, if Mr. Market should offer much lower prices like when he threw a big tantrum in the middle of last year, what some called the "Taper Tantrum", we could buy more with bigger margins of safety. I could develop a bigger appetite quite suddenly then. For now, it is just a nibble.



See presentation slides: here.
See announcement: here.

Related posts:
1. Soilbuild Business Space REIT (Soilbuild REIT).
2. Bonds, REITs and the instant gratification of yield.

30 comments:

E H said...

Sometimes, before I initiate a position, I like to look at what's coming up on the economic calendars, especially the pesky Feds'. Over here, you can see something annoying and possibly disruptive coming up this Wed (USA time). http://www.marketwatch.com/economy-politics/calendars/economic

AK71 said...

Hi E H,

Hahaha.. The pesky Fed. ;p

Well, I wonder what will happen the day after. Hmmm...

Thanks for sharing. :)

E H said...

Maybe if they keep to their current language for the statement, nothing will change and markets will chiong :P But this is as good as buying Big/Small.

AK71 said...

Hi E H,

Luck is ever so important in life. Crossing fingers then. ;p

Siew Mun said...

I initiated a position in May at 0.775 :-)

AK71 said...

Hi Siew Mun,

Then, you got in at a lower price than I did. Good on you. ;)

Jay Kay said...

Hi AK, you said "If 'cost of debt' were to increase by just 1% for debt maturing in 2015, distributable income would see a reduction of some 4%"
and
"Going back to the concern of a possibly higher cost of debt, if 'risk free rates' were to increase by 1%".

May I know what do you refer with 'risk free rates'. How is it differ with 'cost of debt'?.

Appreciate your enlightenment.

Thanks
Jay

AK71 said...

Hi Jay,

Risk free rates will be the long term government bond rates or the rate at which the government pays to borrow.

Singapore does not set interest rates, we control inflation by using exchange rates. Our interest rates are largely "imported" from the USA.

So, if the Fed, US Central Bank, should increase interest rates, we will see our interest rates increasing too.

Anyway, suffice to say that when risk free rates go up, interest rates, both for savings and borrowings will also go up.

AK71 said...

Dispute with JTC:

SBSR announced on 16 January 2015 that it has a rental dispute with JTC on Solaris which comprises about 30% of its total portfolio value. The dispute could impact the valuation of Solaris from $300mn to S$275mn and lower portfolio NAV from S$0.80 to S$0.77. There is no impact on DPU until 2018. SBSR believes it has a strong case and is defending its position vigorously.

Comment:

I still like SBSR which has a running DPU yield of about 8%. The JTC has announced some weakness in industrial capital values and rentals but this doesn’t seem to affect SBSR which is in business parks. Based on guidance, we can expect SBSR to at least be able to maintain in FY2014 DPU into 2015.

An 8% DPU yield is to me very attractive and should be sustainable over the next two years.

Source:
Kevin Scully, nracapital.com.

AK71 said...

I cannot remember whether I spoke about this in the second or third "Evening with AK and friends":

Specific portfolio niche exposure to Business Park space: Riding on secular trend of decentralising business activities outside of the City – Expect businesses to shift away out of the City to Business Parks. SBREIT has two young Business Park properties with an average age of 4.3 years and constitute 39.0% of its portfolio (both weighted by
valuation).


Taken from a report by Phillip Capital dated 16 March 2015.

Source:
http://internetfileserver.phillip.com.sg/POEMS/Stocks/Research/ResearchCoverage/SG/SoilbuildREIT20150316.pdf

AK71 said...

Notwithstanding the healthy 100% tenant retention rate in 1Q15, management cautioned that this is unlikely to be sustained for the rest of the year. We believe this can be attributed largely to macroeconomic headwinds and increased competitive pressures from the large upcoming supply of factory space in Singapore.

The bulk of Soilbuild REIT’s remaining lease expires in FY15 and comes from its West Park BizCentral and Tuas Connection properties.

In terms of capital management, Soilbuild REIT has hedged 81.9% of its total debt. Its average all-in interest cost stands at 3.28%, as at 31 Mar 2015, a slight uptick of 9 bps versus end-2014.

Current aggregate leverage ratio has also increased from 35.4% (as at 31 Dec 2014) to 38.5%, as this includes the interest free loan from its sponsor and deferred payment in relation to the Solaris upfront land premium to be paid to JTC.

On the acquisition front, management plans to complete the purchase of 72 Loyang Way by end 2Q15 (total acquisition cost of S$98.1m), and we believe this would be financed by both debt and equity. Pending the finalisation of the funding structure, we have not incorporated this acquisition in our model.

Maintain BUY and S$0.93 fair value on Soilbuild REIT.

Source:
OCBC Investment Research

INVS 2.0 said...

Hi Ak,

SB has encountered a rent default by one of its tenants, Technics Oil & Gas Pte Ltd. It looks quite serious.

AK71 said...

Hi INVS 2.0,

I won't jump to conclusions. The tenant has a guarantor. There is legal recourse. I will wait and see. ;)

INVS 2.0 said...

Hi Ak,

It remains to be seen if SB can get back the outstanding money from Technics. In the meantime, it creates uncertainty and look, a major selldown in SB shares today. :/

But it means a good opportunity to get some SB shares at a cheaper price now? :P

AK71 said...

Hi INVS 2.0,

Mr. Market does not like uncertainty.

I would ask whether is it certain that the REIT would take a blow from which it would not recover because of this? ;p

INVS 2.0 said...

Hi Ak,

Legal recourse is an expensive process and whether SB can get back the outstanding rent is still a question. Therefore, I would refrain from touching SB until there is greater certainty with the legal outcome. But overall, it is still a fundamentally strong REIT. :)

AK71 said...

Hi INVS 2.0,

For sure, it is better to wait for the dust to settle or for the price to get to a level which we are sure we have a wider margin of safety. :)

bQ said...

Hi AK.

What so u think of the proposed acquisition of bukit batok connection? The first year rental is 8m, proposed acquisition is abt 100m. Can we say that the acquisition is not yield accretive? Is that why the share price is coming down?

Also, any concerns u might have regarding this interest party transaction?

AK71 said...

Hi bQ,

Upon completion of the property’s acquisition, SB Westview Investment, which is a subsidiary of the REIT’s sponsor, will enter into a master lease agreement with Soilbuild REIT to lease-back the entire property for a period of seven years on a double net basis. Rent for the first year under the master lease agreement has been fixed at SGD8.0 million and subject to a rental escalation of up to 2.0% every year.

Soilbuild REIT’s manager has said that it intends to fund the acquisition either through debt financing, the issuance of perpetual securities, or a mix of both, depending on prevailing market conditions. Should the acquisition be funded fully through debt, Soilbuild REIT’s aggregate leverage will increase from 36.0% to 40.8%.


Since it is funded fully through debt, this is likely to be DPU accretive.

bQ said...

Hi AK,

Thanks for your fast response!

:)

keng said...

Hi AK,

Looking at the statement by Soilbuild REIT's manager, it is still not firmed on whether the acquisition will be fully funded through debt, "...intends to fund the acquisition either through debt financing, the issuance of perpetual securities, or a mix of both, depending on prevailing market conditions..."


Looking at the current price, will you consider taking a bigger bite as compared to a nibble? :P

AK71 said...

Hi keng,

Well, perpetual bonds are really debt instruments. ;p

I think Soilbuild REIT is inexpensive at the current price and I might buy some if I did not already have exposure to it. However, to add to my investment, I might do so if unit price is a bit lower. ;p

keng said...

Thanks for the invaluable reply! :)

AK71 said...

Hi keng,

Alamak. Dun liddat say. I talking nonsense most of the time. -.-"

Sunny said...

Hi, AK

Will you subscribe share placement, buy some more when price is coming down or sell away your sh in this company?

AK71 said...

Hi Sunny,

I like buying a fairly priced building that generates a meaningful level of income which has visibility for many years to come. So, I am participating.

I said this in FB and also elsewhere in the comments section here in my blog. You might want to follow me on FB or my blog's comments section as well. :)

See: Following AK etc.

Wei Xiong How said...

Hi ak, the recent Soilbuild biz Reit results is out. Still no updates regarding the Loyang property, and negative rental reversion. Are you concerned by these developments?

AK71 said...

Hi WX,

They had a stroke of bad luck with Technics and I am prepared for a 10% reduction in DPU which I suspect Mr. Market has priced in.

keng said...

Hello AK,

Wonder which is better?

Bite the bullet and sell the property at a discount to fund acquisitions;
or continue holding on to a potential deadweight with little or no tenants?

AK71 said...

Hi keng,

It depends on the options available. Without knowing the options available, there is little point in thinking about this. Hope the manager is worth their salt. ;)

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