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Decline in Soilbuild REIT's DPU likely.

Wednesday, September 20, 2017

In its 1H FY2017 report, Soilbuild REIT's management said that the biggest challenge they were facing was to lease the entire space at 72 Loyang Way because of the weak oil and gas sector.

Now, they are going to have to deal with 2 hot potatoes instead of 1.

NK Ingredients, one of the REIT's top 10 tenants by revenue, has defaulted and the fact that they accounted for almost 6% of Soilbuild REIT's revenue is going to hurt.

The loss might not be as traumatizing this round but to be hit by another loss before being able to recover from an earlier one is very unfortunate.

The trauma is cumulative.

The rental guarantee from NK Ingredients' insurance will provide another 4 months of rental income.

So, Soilbuild REIT has 4 months to secure another tenant if it is to reduce the negative impact the default has on its revenue.

NK Ingredients signed a 15 years lease which was supposed to provide some earnings visibility till the year 2028 for Soilbuild REIT. 

Such a long lease agreement is necessary because being in the chemicals industry, I believe that the asset was probably purpose built.

It probably means that it would be rather difficult to find another tenant to move in within a short period of time.

So, we should logically expect another reduction in the REIT's DPU with this development.

We could also see the REIT's NAV come under pressure if the asset remains vacant for a prolonged period.
See related post #1 below.

In the worst case scenario, going by the above statement, if the asset remains vacant, with a hypothetical half year DPU of 2.64c, if we demand at least an 8% distribution yield, we would only be buyers at 66c a unit.

Related posts:
1. An opinion of Soilbuild REIT.
2. 2016 income from S-REITs.
In 2H 2016, I added to my investment in Soilbuild REIT due to a rights issue. This was at 63c per rights unit. I took up my entitlement and also applied for excess rights. From that exercise, I increased my investment in the REIT by more than 10%.
See slides presentation: HERE.


john said...

I had divested my holdings in Soilbuild after the announcement and re-invest OUE Ltd instead.

AK71 said...

Hi John,

I am invested in OUE Limited too.

Good luck to both of us. ;)

Laurence said...

For months, I've been lamenting that OUE seems to be a despised step-child amid the boom in other property counters.

redponza said...

I think the property will not be vacant for long, most probably only 1-2 years.

As for Soilbuild REIT, with DPU in a downward trend, I will probably require 9% yield as a starting point.

Hope it will not reach that point.

AK71 said...

Hi Laurence,

There is no accounting for Mr. Market's moods.

AK71 said...

Hi redponza,

With a remaining land lease of 30 years, to be vacant for 1 to 2 years is very long.

Laurence said...

Wow, AK is indeed the Oracle of REITs. What you say is not only accorded heavyweight but is also quoted in financial publications:

Currently, Soilbuild Business Space REIT (SGX: SV3U) received a HOLD call with a fair value of $0.67 which may decrease in the future.

Renowned financial blogger AK has noted that for SoilBuild REIT to achieve a 8.0% distribution yield, it will only make sense for investors to enter the market at $0.66, which is similar to the estimation given by OCBC Research.


AK71 said...

Hi Laurence,

I hope you and other readers appreciate that it is just one person's opinion.

There is nothing special about that opinion and it could be wrong. ;)

Benjy Tan said...

So what's your take on this counter. Reduce your holding and switch to perhaps Fraser L&I trust.

- Free hold;
- diversified to Australia in this oversupply scenario in the local industrial space.
- equally strong mgt team(I think the Thai Boss poach back all the ex Australand managers to look after the Australia Properties Group)
- hedge the downward risk in case it falls to maybe less than 66 cents .

This is in response to the 2 bad news that you mention. The build to suit single tenant building will be hard to fill or sell.

AK71 said...

Hi Benjy,

My take? Exactly what I said in this blog.

I am invested in FLT too.

See: Fraser L&I Trust and CapitaLand Retail China Trust added.

AK71 said...

PK Jan says...
buyers 66 cents still hold? ๐Ÿ˜“

AK says...
Since the blog was published, Soilbuild REIT now has 3 hot potatoes instead of 2. So, I would wait for the dust to settle. It is not as if die die I must buy more Soilbuild REIT. ;)

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