SoilBuild REIT High Yield Provided Investors Can Stomach the Risks

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2016 was an exciting year for SoilBuild REIT. I have been following SoilBuild REIT closely since I held 5% of Soilbuild REIT in my stock portfolio. Activities in 2016 includes the Default of Technics Offshore Marine, Acquisition of Bukit Batok Connection and Preferential Shares Offering.

On 23rd January 2017, Soilbuild REIT has announced its 4Q2016 financial results. Gross Revenue, Net Property Income and Distributable Income has all increased. However, distribution per unit (“DPU”) has fallen by 2.7%. I concluded the decline in distribution per unit to the additional units available due to the preferential shares offering which has diluted its earning per share.

4Q2016
(S$’000)
4Q2015
(S$’000)
Change
Gross Revenue 21,687 20,434 1.6%
Net Property Income 18,892 17,490 8.0%
Distributable Income 16,365 15,091 8.4%
Distribution Per Unit (“DPU”) (cents) 1.570 1.614 (2.7%)

As at 31 December 2016, Soilbuild REIT had 1,042,173,741 Units as compared to 31 December 2015 where Soilbuild REIT had 934,441,690 units. This explains the decline in distribution per unit.

2016
(S$’000)
2015
(S$’000)
Change
Gross Revenue  81,130  79,340  2.3%
Net Property Income  70,674  67,777  4.3%
Distributable Income  60,252  57,867  4.1%
Annualized Distribution Per Unit (“DPU”) (cents)  6.091  6.487  (6.1%)

Dividend Yield

At a closing price of S$0.64 on 30 December 2016, this represents a dividend yield of 9.51%. This is pretty attractive to me provided investors can stomach the investment risks.

Investment Risks

1. Weak Demand

The Ministry of Trade and Industry has cautioned weak demand conditions in the marine and offshore engineering segment. As you can see from the below chart, 11% of SoilBuild REIT asset is in the Marine Offshore trade sector.

2. Softening Industrial Rental Indices

Rental indices for warehouses fell by the largest margin of 4.4%, followed by contraction in the single-user, multi-user and business park properties of 2.1%, 1.3% and 0.2% respectively. Most likely, this will impact SoilBuild REIT gross revenue in 2017.

3. Technics Offshore Engineering

As of 31st December 2016, SoilBuild REIT portfolio occupancy rate stood at 89.6%. This is in consideration of the default of Technics Offshore Marine at 72 Loyang Way which means the downside has been factored in.

The security deposit from the default of Technics Offshore Marine will be depleted by May 2017. There will be an impact to the financials should the manager be unable to find a replacement tenant by May 2017.

4. Tuas Connection

Occupancy from the Multi-Tenant property Tuas Connection is trending lower at only 86.3% occupied in 4Q2016. Tuas Connection is the largest industrial property in SoilBuild REIT portfolio, valuated at S$122 million.

5. Solaris Lease Expiry

The lease for Solaris is expiring in 15 August 2018. In terms of valuation, The two business parks, Solaris and Eightrium forms 40% bulk of SoildBuild REIT portfolio.

The lease renewal can be funded via

  1. Taking more debt (Either secured or unsecured loan). At current gearing of 36.7%, there is still room for further debt of 50 million.
  2. Issuance of Preferential Shares. This will again dilute the earnings per share.
  3. A combination of option 1 and 2 above.

4 thoughts to “SoilBuild REIT High Yield Provided Investors Can Stomach the Risks”

  1. Hi there:)

    Thanks for the great succinct summary of SB REIT!

    However, there’s something that befuddle me and it’ll be awesome if you’re able to help me with it:p

    With regards to Pt5 where you mentioned that Solaris’s lease is due to expire by 15 Aug’18 and lease renewal is required to be funded, can I just seek to clarify the following:

    – Isn’t this lease expiry all about tenancy lease instead of land lease? If so, why should SB REIT undertake funding to secure tenancy lease?

    – Why will the funding affect SB REIT? Given that the renewal of the tenancy lease will be undertaken by a different entity (SB Solaris).

    Thanks in advance for clarifying!

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