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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. ;)

Unknown 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? 😓

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. ;)

AK71 said...

Soilbuild Business Space Reit has on Thursday signed a put and call option agreement to divest to SB (Pioneer) Investment its Tuas property, commonly known as KTL Offshore after its tenant, for S$55 million.

The buyer is a wholly owned subsidiary of Soilbuild Group Holdings, which is the sponsor of Soilbuild Reit.

The property is currently leased to KTL Offshore under a lease agreement which expires in August 2021. As at Dec 28, 2017, Soilbuild Reit's trade receivable due from KTL Offshore comprised about six months of rent and other charges, including a sum of S$1.5 million.

The trust said that with the divestment, it will minimise its exposure to credit risk in the form of non-payment of sums due from KTL Offshore. The sale will also allow it to reduce its exposure to the marine offshore and oil & gas industry in light of the sector's current weakness. The trust can diversify its tenant base instead.


csky said...

Hi Ak,

Seems like you often require at least 8% yield for reits that have certain uncertainty built in.. why 8% and not 9% or 7%? How would 8% yield protect against sudden changes (and hence drop in prices) such as the issues that Soilbuild is facing?

What is your thinking regarding yield and potential capital loss when it comes to Reits?

Thank you!

AK71 said...

Hi csky,

What is an attractive yield to me depends on what other investments are available out there. If you can get a 5% yield from an investment that pays out 75% of its earnings, compared to a REIT that pays out 100% of its cash flow and more than its earnings, which one is more attractive?

It is mostly about comparative analysis. It is all relative.

If, however, we are able to determine that a certain REIT is undervalued and you might be familiar with my analysis of Saizen REIT and why I made it such a big investment before, we should pounce on it.

Having said that, bad things do happen sometimes like with Soilbuild REIT. I will stay invested unless it is a basket case because REITs are really investments for income.

There is always a potential for capital loss in any investment and not just REITs. If we cannot stomach this possibility, it is hard to be an investor because we cannot always get it right.

AK71 said...

You might be interested in this blog:

csky said...

Thanks AK! Haha, it always seems so easy and common sense after reading your posts... but when I try to do the analysis on my own.. always end up getting sucked into some black holes and cannot come up with much convincing conclusion myself :p

But of course, from your analysis, can see that you do have very thorough knowledge of the companies and the peers that you compare against. So I guess that's one area I need to brush up on. Do you read 500 pages a day like Warren Buffet :p?

AK71 said...

Hi csky,

Honestly, I don't have thorough knowledge of anything.

As long as I am approximately right, I should reasonably do better than being absolutely wrong. :)

AK71 said...

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