The industrial REIT space is proving challenging for investors looking for dividends. With the economy doing not so well, it has been a struggle for businesses to rent more space when business is affected.
This proved a challenging environment for the industrial REIT manager to retain their lessors, not to mention keep overall net property income good.
This will prove a good environment for the shareholders and prospective dividend investors to access the performance of the manager.
Soilbuild Business Space REIT is a relatively new industrial trust with much of its properties in business park with a average portfolio land lease of more than 45 years and weighted average lease expiry of 4.7 years.
It should compete with Cambridge, Sabana and Aims Amp in the smaller industrial REIT space. (Do check out how they fair in terms of net debt to asset and dividend yield at my Dividend Stock Tracker)
Here are some of my main take away from their latest 1st quarter review.
Limited Increase Supply in Business Park
The business park have become a very interesting segment in Singapore in that it is like a 4 room HDB flat. It act as the go to for the office commercial down graders while commanding a higher PSF versus other industrial properties.
About 60% of Soilbuild business’s assets are in business park so it is good that after this year, upcoming supply is limited. However, we should also note that the sector that has the greatest supply amongst the segment, single-user factory still comprises a sizable part of Soilbuild’s portfolio.
Counter-Party Risk: Relatively Large Composition to Oil and Gas Industry
While the WALE of the REIT is long at 4.7 years, which could help Soilbuild Business steer through the challenging excess supply, the problem have been its relative exposure to the troubled oil and gas sector.
11.9% of their gross revenue is attributed to Tuas Connection, which houses a fair bit of oil and gas companies.
In terms of trade sectors, 12% is attributed to oil and gas with their sale and lease back to Technics Oil and Gas being a big part of it.
When they did the deal, the lease was for 15 years and a great Internal Rate of Return, for an asset with the same amount of land lease left.
The issue just like chartering a ship to a shipper is that, in bad times when the shipper cannot pay you, there is nothing much you can do.
In this case while there are rent pre-payment, Soilbuild run the risk of having to find someone to rent the space in a short period of time, when there are excess supply coming online.
The saving grace is that the property is a waterfront property which might make it unique to rent out better. Still that will impact the return on investment originally calculated, and make this deal a negative mark on the manager.
New Leases and Renewal Leases Performance
Watching this area of the presentation gives us an idea to compare whether the managers are Soilbuild Business are doing ok, better or worse versus their peers.
It also gives us an opportunity to take stock of the demand and supply sentiments.
There are bright spots where the rent revision is 2%/yr but also that the manager is facing challenging prospects to renew leases in the face of competition.
This, when put together with the drop in occupancy again, should give you an indication that when you purchase the REIT, don’t expect a forward DPU increase but evaluate whether the DPU will go down!
Soilbuild’s DPU is down 4.7%. Occupancy is falling to 94.8%.
The annualized dividend yield according to my Dividend Stock Tracker is 8.4%, which sits on the lower end compared to Viva (9.5%), Cambridge (8.1%), Sabana (9.2%), Aims Amp (8.4%). As a comparison, the large industrial REITs Ascendas dividend yield is 5.7% and MIT (6.7%).
The net debt to asset at 34% is reasonable, but if the value of properties go down, this could easily become 40%.
While we like that it has a proportion in business park, similar to Viva, and very unlike Cambridge, Sabana and Aims, some wargaming could be, what if they lost 10% of the tenants that they are unable to rent out, NPI falls by 12%, and so do DPU, would 7.5% be still a good enough return?
I think if that scenario happens, Soilbuild rather sturdy share price would take a beating so that the prevailing dividend yield then maintains at 8.5%.
If you purchase MIT and Ascendas, while the dividend yield is lower, you might not get such a concentrated risk. Then again we may be worrying too much.
There are much for you to think about, and different REITs suits people with different time management. There will be those who would actively sought out and try to get the highest yield, and then there will be those who wants to be more passive.
There are different level of risk, and it is a question is whether the reward is enough to compensate for the risk.