3 High Yield SG Reits That Investors Should be Cautious About Part 2

If you missed part 1 on $ESR-REIT(J91U.SI), here is the link: https://www.investingnote.com/posts/1614212

$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.

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@Pizzaprata Thanks for the writeup! looking forward to the next post on $Cache Log Trust(K2LU.SI)


Thanks for the analysis. It looks like Soildbuilt REIT has some leeway to fall...


Reply to @wiseinvestor : It's a worse case scenario assuming no income from NKI and no improvement in their other properties. Eventually some properties will improve like Eightrium which was affected by DBS departure in March. How long will it take is anybody's guess. Anyway I prefer them to ESR.

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3 High Yield SG Reits That Investors Should be Cautious About Part 3

If you missed part 2 on $SoilbuildBizReit(SV3U.SI), here is the link: https://www.investingnote.com/posts/1618055

Sorry for the delay for this final part, there was lots of action in the Reit Sphere recently, so I was distracted. Here goes: $Cache Log Trust(K2LU.SI) or CLT currently own 27 logistics warehouse properties, 10 in Singapore and 17 in Australia. I was invested in this Reit for a long time due to its high dividend yields. I reduced my holdings when CLT started losing it’s Master Leases however I still kept 30k shares as I liked CLT’s expansion into Australia. The Australian properties are certainly more attractive: high yield, freehold land, long WALE with annual rental escalations of 2.5 to 4%.

However, I sold all my shares right after the disappointing 2Q2019 results. The DPU fell 12.7% QoQ, this was despite a new acquisition of an Australian warehouse in Apr 2019 and a one-off distribution of $2.7 million from an earlier settlement case (Schenker Hub). Without this one-off distribution, the DPU will be only 1.071 which would give an annualised yield of 5.9% at the current share price.

The poor performance last quarter was attributed to the loss of another Master Lease (Precise Two) and the loss of tenants at Commodity Hub. Although since then, CLT has announced that they have secured a new major tenant for Commodity Hub, I still think investors should be cautious for the following reasons:

  • CLT’s former sponsor CWT is facing financial difficulties and still accounts for 14.8% of CLT’s Gross Revenue.

  • Continued weakness of the Australian Dollar. The AUD/SGD exchange rate has fallen around 6% in the past year and is still on the declining trend.

  • High property expenses. The latest NPI margin which is NPI/Gross Revenue has fallen to 68% from 75% last year (excluding the effects of new FRS116). Most Industrial Reits NPI margin are between 75 to 80%. What this means is that CLT is spending more than its peers on property maintenance.

Not all Reits with high yields are bad. Some may be worth buying if the reasons for the share price drop are not justified or permanent. Next time I will share 3 high yield Reits which I invested in recently.

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3 High Yield SG Reits That Investors Should be Cautious About Part 1

The following Industrial Reits are currently trading at relatively high yields:
$ESR-REIT(J91U.SI) @7.8% yield
$SoilbuildBizReit(SV3U.SI) @8.7% yield
$Cache Log Trust(K2LU.SI) @8.0% yield
As I have previously shared before investors must not only look at the yield as yields are calculated based on past DPUs. We need to look deep into each Reit to determine if the DPUs are sustainable or if any upcoming action by the Reit management is detrimental to the shareholders.
We will look into ESR first. I have written about ESR’s management past actions that were unfavourable to shareholders: the VIT acquisition link here https://www.investingnote.com/posts/989148 and the recent EFR link here https://www.investingnote.com/posts/1483778
You might say that the DPU has gone up slightly after the VIT merger. Actually that’s due to financial engineering. If you look at the latest 2Q2019 results, there was distribution from past disposal gains of 3.78 million and 2.1 million in management fees paid in units ($0 before merger). Without these support the DPU would have dropped from 1.004 to 0.819 which is 14% lower than the 2Q2017 DPU before the acquisition.
Previously I mentioned that two of the EFR purpose are good for shareholders, the AEIs and the acquisition. Upon closer look at the acquisition, the DPU accretion is only 0.4% despite taking on a high level of financing of 65% for the acquisition. If they were to take a more reasonable level of debt like 40%, the acquisition will be dilutive. You can say this is another form of financial engineering as the Reit must now raise more funds to reduce the higher gearing. Having said that the acquisition is good in the long term due to the long WALE of 10 years and the tenant PTC is certainly more reliable than Hyflux.
ESR have completed the private placement of $100 million @51.5 cents, which is the share price now. They are planning to raise another 50 million through a PO which will definitely be at a discount to today’s price which is why I urge investors who are interested to be cautious. ESR is waiting for tomorrow’s EGM before initiating the PO as they need the whitewash resolution in case there is less demand so they can pick up ESR shares at a discount without triggering a takeover. Do take note that tomorrow’s EGM will also have some resolutions that would be dilutive to shareholders in the long term. They are proposing to pay the development fees and the property management fee in units.
It is important not just to follow the buy calls of some analysts but to do your own research. I am not saying that ESR is a bad investment for the long term but I think it’s better to wait until closer to when the benefits of the AEI can be realised. Good luck to those vested.
I will share about SBR and CLT in the next part.

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Target Price

The management of $ESR-REIT(J91U.SI) have screwed the unit holders again just when the share price have recovered. They are raising at least $150 million in equity through private placement and preference share offer. 44m is to finance an acquisition, 46m is to finance AEI's and the largest amount 57m is for debt repayment.
The first two items are good as they are DPU accretive although unitholders will have to wait at least two years to see the benefits of the AEIs which is also highly dependent on the demand of Industrial properties then. However the last item, debt repayment would hit the DPU of shareholders immediately. why the management need to repay some debt now is that they took on too much debt during the merge with VIT. The Reit gearing is currently at 42.1% which is uncomfortably close to the statutory limit of 45%. If there is a recession which is possible due to the trade war, the gearing could hit the limit at the next revaluation of assets.
In the managements illustration below, the DPU will drop to 3.984 after all the transactions. However this includes the additional rental from the AEIs which like I said would come in 2 years later. So immediately after equity fund raising, the DPU would drop by 4% to 3.864. The DPU will drop even more if the management decide to upsize the share placement from 75m to 100m.
That's why in my previous post on MIT, I said that one of the most important criteria in Reit selection is management track record. If they screw you once, they will continue to screw you again.

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Target Price

The liquidation of Hyflux is almost a confirmed thing now that the rescue plan has fallen apart. Hyflux subsidiary, Hyflux Membrane Manufacturing is the 3rd largest tenant by Rental Income of $ESR-REIT(J91U.SI). This loss of tenant would mean that the DPU will fall by 5.4% based on the latest 4Q2018 DPU. This would bring the Reit's yield to below 7% which is poor for an industial Reit with short land tenures. Their 2nd largest property valued at 322.8 million has only 12 years of land lease left. The valuation of this property should be dropping like crazy in a few years time.
Furthermore even without this loss, the 4Q2018 DPU is not sustainanble due to 1.8 million of the distribution amount is from SLA's payment for land acquisition. Another 1.8 million is from the management fee payable in units. Lastly all investors of ESR Reit should know that the rental support of their biggest property UE Biz Hub ended at the end of 2018. Please DYODD.

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Why $ESR-REIT(J91U.SI) shareholders should vote No to the merger with $Viva Ind Tr(T8B.SI)
ESR REIT shareholders will be meeting this Friday to vote on the proposed merger with VIT. Here's some reasons why the merger is not good for ESR REIT holders:
1. ESR is paying 26.4% premium to NAV. Would you buy a flat that is selling at 26% above valuation? It doesn't make sense but that's what ESR is planning to do. There are reasons why VIT's valuation is so low compared with the yield.
2. VIT's properties have rental support amounting to $12.1 million per year which will end in November 2018. This will significantly affect the DPU after merger.
3. Short land lease remaining of less than 13 years for two of VIT's properties Viva Business Park and Jackson Square.
4. The REIT manager says that this merger is DPU accretive but if you read the fine print, this is without considering the effect of the preferential offer of 262.8 million shares done in March 2018 before the merger announcement. This preferential offer (PO) was most likely to beef up the balance sheet before the merger. If you include the effects of the PO then the DPU will actually drop from 3.853 to 3.731
5. If the VIT shareholders vote to pay the 0.25% VIT Facilitation fee, it means the merged REIT will not only have to pay the acquisition fee of $12.5 million (payable in units) but also the other party's divestment fee of about $2.4 million (payable in cash).
The market also do not like the merger as the share price dropped immediately after the merger announcement. The ESR manager should stop looking at mergers which would involve high premiums and start looking into individual properties of better value including overseas properties like other REITs. Also after more than a year the new sponsor have yet to inject any properties to the REIT.
Fellow ESR REIT shareholders, see you this Friday.

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