Soilbuild Business Space REIT Has A High Distribution Yield Of 8.4%, But I’m Staying Away From It For Now

Soilbuild Business Space REIT  (SGX: SV3U) is a real estate investment trust that invests primarily in industrial and business park properties in Singapore. The REIT’s portfolio includes properties such as Solaris, West Park BizCentral, and Eightrium.

The REIT recently captured my attention due to its high distribution yield; at its current unit price of S$0.66, it has a yield of 8.4%. But, after digging deeper, I found a number of worrying signs about the REIT which caused me to stay away from it for now. In this article, I would like to share the signs. [Editor’s note: An article discussing more of the troubling signs of Soilbuild Business Space REIT has been published. It can be found here.]

Sign 1: Poor financial performance

In the first quarter of 2018, Soilbuild Business Space REIT reported that its net property income (NPI) had declined by 4.3% year-on-year to S$17.0 million. Its distribution per unit (DPU) fared worse, falling by 11.1% to 1.324 cents. On a sequential basis, both metrics also came in 4.3% lower for the REIT.

Suffice to say that Soilbuild Business Space REIT’s financial numbers for 2018’s first quarter were not pretty.

Sign 2: Weak occupancy rates

The occupancy rate is a measure of the level of market demand for a REIT’s properties. Ideally, we want to see a occupancy rate that is high, and stable or increasing.

This, however, has not been the case for Soilbuild Business Space REIT. In the reporting quarter, the REIT’s occupancy rate dipped below 90% to 87.5%, the lowest level seen going back to the first quarter of 2014.

Non-renewals of some expiring leases at Westpark BizCentral and Eightrium resulted in their occupancy rates falling to 81.5% and 84.9%, respectively, in the first quarter of 2018. What’s worrying is the reason behind the non-renewals given by Soilbuild Business Space REIT in its earnings update:

“The non-renewals were mainly due to tenants’ business closures and downsizing and tenants shifting into facilities they have acquired.”

If some of the REIT’s tenants had closed down or were downsizing their businesses, I wonder how many more of the REIT’s tenants are contemplating similar actions at the moment.

Sign 3: Negative rental reversion rates

In 2018’s first quarter, Soilbuild Business Space REIT leased 302,994 square feet of space (that’s 8.2% of its total net lettable area) at an average rental reversion rate of a negative 7.8%. Of the 302,994 square feet of space, 250,997 square feet were for lease renewals; the renewed leases had a negative rental reversion of 7.2%. The remaining 51,997 square feet of space were new leases, and the REIT logged a negative rental reversion of 11.9% on these leases.

The negative rental reversion rate for the renewed leases meant that Soilbuild Business Space REIT had to reduce its rental rates to keep its tenants. Worse still, the REIT had to reduce its rental rates even more to attract new tenants.

A Foolish conclusion

In sum, Soilbuild Business Space REIT may have a high distribution yield that looks attractive. But, investors should at least be aware of the risks mentioned above when making an investment decision about the REIT.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.