Soilbuild REIT: A nibble.

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.

Soilbuild Business Space REIT (Soilbuild REIT).

This REIT's full name is a mouthful. Reminds me of Sabana REIT and AA REITs' full names. Maybe, based on that, I should be interested in it.

Soilbuild gave a range of unit prices from S$0.77 to S$0.80 and had to settle for $0.78. This gives me the impression that Mr. Market might not be too keen on the IPO.

"Soilbuild Business Space REIT (Soilbuild REIT), which owns two business parks and five industrial properties, is offering 586.5 million units. The placement tranche comprises 524 million units and the public offer 62.5 million units.

"At S$0.78, the REIT offers a dividend yield of 7.7 per cent based on projections for fiscal 2014.
Soilbuild and founder Lim Chap Huat will hold an interest of about 27 per cent in the REIT post-IPO, the company said.

"The IPO closes on Aug 14, with listing scheduled for Aug 16." (Source: TODAY online)

At $0.78 a unit, it is at a slight discount to NAV of $0.80 a unit and gearing is approximately 30%. The weighted average lease of its portfolio of properties is 50.5 years.

While seasoned investors in REITs might say that it is possible to get a higher distribution yield from Sabana REIT, with Soilbuild REIT, we wouldn't have to worry about expiring tenancies until much later. Also, Sabana REIT's gearing is closer to 40% than 30%.

Of course, the longer weighted average lease of its properties might make Soilbuild REIT a preferred choice for investors worried about land lease renewals.

Is this a buy? Well, investors for income should be attracted to this IPO. I do not see any red flags in the numbers. However, given the current cautious mood towards REITs, if we are expecting big capital gains, we could be disappointed.

Could it not do a 10% price appreciation on its debut like SPH REIT did? Although that would send its distribution yield for 2014 to under 7%, it could happen. Who knows? Frankly, if that should happen, AIMS AMP Capital Industrial REIT, with its redevelopment plans and AEIs, would look more attractive then.

So, I do not see how Soilbuild REIT is significantly more attractive than other industrial S-REITs for Mr. Market to pay much more for it. I feel that the IPO is pricing Soilbuild REIT at a fair price.