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Soilbuild REIT: A nibble.

Monday, September 15, 2014

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).

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 .