3 High Yield SG Reits That Investors Should be Cautious About Part 2
$SoilbuildBizReit(SV3U.SI) or SBR share price have dropped by 13% recently so I took a look to see if it’s worth buying. Sometimes it pays off to pick up oversold shares at bargain prices as long as you understand the reasons for the sell off. There were two reasons this time, first NKI defaulted on their July rent which I will talk in detail later. Second SBR launched a PO to raise 101.8 million for the acquisition of 25 Grenfell Street, a Class A Office Building in Adelaide, Australia. The reason the share price fell was because the acquisition was DPU dilutive by 2.4 to 3.3%. There was also an odd item in the transaction where SBR have to pay Rental Incentives of AUD5 million to an incoming tenant. Basically it means that overall SBR is paying 3.7% above valuation.
Frankly I like this acquisition other than the DPU dilutive part, the property’s Freehold, quality tenants and a long WALE of 5 years. It is good in the long run and SBR is going in the right direction. However I would not buy the share now due to the likely default of NKI which will have a big impact. SBR has been hit by a series of major tenant defaults, Technics Offshore, KTL Offshore and now NKI. That’s why as part of one’s due diligence on Reits, we need to check on the quality of the major tenants. Which was why I was less than happy when ESR bought Hyflux’s Tuas property and lease it back to them when Hyflux was already bleeding badly.
NKI is currently SBR’s second largest tenant and accounts for 6.2% of the total Gross Rental Income. NKI first defaulted way back in October 2017 with 12 months of security deposits. Since then they manage to top up the security deposits along the way until July 2019, when the amount owed has exceeded the security deposit so there will be no income from NKI from 3Q2019. This thing will drag on for sometime as SBR has supported the appointment of a Judicial Manager for NKI. I believe the reason SBR did not take action to evict NKI is that the property will be very difficult to lease out in its current state. The property is customised for NKI and consists of seven blocks. Some say that SBR can redevelop the property but it won’t be easy to find a big industrial tenant in these difficult times.
I estimate that DPU will be hit by around 11% so you are looking at an annual yield of around 7.4% at the current price provided that there are no more tenants leaving. If you think that this yield is sufficient for you while you wait for the NKI matter to resolve, please take note that the new tenant for 25 Grenfell Street will commence only in May2020. SBR did not state how much space this new tenant will be taking up but I guess it must be big enough to offer them 5 million. So the yield will be lower than that until then.
Good luck to those vested, will writeup on $Cache Log Trust(K2LU.SI) next.