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Was Soilbuild REIT a shabby investment?

Tuesday, January 16, 2018

Soilbuild REIT had to juggle not one, not two but three hot potatoes up until last month.

With the sale of KTL Offshore's property to its sponsor, they have two hot potatoes left (i.e. Technics and NK Ingredients).

In a blog in September last year (see related post at the end of this blog), I said that with the reduced DPU assumed then, if we demanded an 8% yield, we should only be buyers at 66c a unit.

Now, with KTL Offshore gone, with lower income, we won't be wrong to downgrade the REIT.

I wonder also if the REIT would see lower valuations which would impact its NAV and, therefore, its gearing level?

Estimating a more aggressive 10% reduction in the DPU assumed in September 2017, all else remaining equal, we might be looking at a full year DPU of 4.8c.

At 71c a unit, that is a prospective distribution yield of 6.76%.

From an industrial REIT with leasehold properties in Singapore, to me, it hardly seems adequate.

I say this partly because a REIT distributes cash flow and does not retain earnings.

So, the relatively low distribution yield is just not attractive enough for me.

If we demand an 8% yield, then, we should only be buying at 60c a unit with the reduced DPU assumption.

If we are less demanding, a 7.5% yield means we should pay no more than 64c a unit.

However, if we demand a 7.5% yield, we can get that by investing in AIMS AMP Capital Industrial REIT which has a lower gearing level too.

How has the investment in Soilbuild REIT turned out for me?

To be fair, Soilbuild REIT's business parks (with relatively long remaining land leases to boot) are attractive and they were the main reason why I invested in the REIT in 2H 2014.

Unfortunately, bad things happen sometimes.

I believe that selling at NAV is a good outcome although I estimate a capital loss of around $4,000 from the sale.

Having said this, I have received more than $17,000 in income distributions from the REIT since I first became a unit holder.

Yes, I did say before that my investment in the REIT was a relatively small one.

So, roughly, the investment returned more than 8% per annum.

Not fantastic but, as an investment for income, not too shabby either.

Having plonked quite a bit of money in SingTel and ComfortDelgro in 4Q 2017, the money from this sale will shore up my cash position.

Related post:
Decline in Soilbuild REIT's DPU likely.


Laurence said...

Oh no, everyone ready ASSI will be jumping ship en masse.
The past year, even stock analysts have been treating Soilbuild REIT like a despised step-child.

AK71 said...

Hi Laurence,

Hard to tell how the wheel of fortune turns but the rebound in Soilbuild REIT's unit price is an opportunity to let go at NAV which is a pretty decent deal for me as a seller given the circumstances.

AK71 said...

PK Jan says...

Soilbuild REIT (source: MKE morning highlights)

- 4Q17 DPU fell 11.9% to 1.383¢, bringing FY17 DPU of 5.712¢ (-6.2%) in line with estimates.

- For the quarter, revenue declined 4.3% to $20.7m due to lower contribution from 72 Loyang Way, but partially mitigated by higher takings from NK Ingredients, KTL, Solaris and West Park BizCentral.

- NPI slid 6% to $17.6m on higher property expenses incurred at 72 Loyang Way.

- Completed 120,000 sf of renewals and secured 90,000 sf of new leases in 4Q17 despite soft leasing environment but suffered negative rental reversions of 15.7% for new and renewal leases.

- Occupancy rate weakened to 92.7% (-1.4ppt), while aggregate leverage stayed at 40.6% (3Q17: 37.9%).

- Trades at 8.1% FY17 yield and 1.1x P/B.

AK71 said...

PK Jan says...

Source: OCBC Research

The REIT offers a dividend yield of 6.8%/6.7% for FY18/19 but may face downward pressure on rents due to the oversupply in SG’s industrial space.

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