3 Reasons I’m Avoiding This REIT With a 9.1% Distribution Yield
Income investors normally target companies and businesses with high dividend yields, as this means they’ll be able to obtain a higher level of passive income per dollar of capital invested. However, things are not always so simple, as a high dividend yield may sometimes turn out to be a value trap, lulling investors into a false sense of security even as the business continues to suffer.
I believe this is the case for Soilbuild Business Space REIT (SGX: SV3U), a Singapore- and Australia-focused REIT with a portfolio of business parks and industrial properties. Its portfolio consists of 11 properties in Singapore and two properties in Australia with a total net lettable area of 4.03 million square feet and an occupancy rate of 88.6% as of 30 June 2019.
The REIT sports a trailing-12-month dividend yield of 9.1% at the last traded price of S$0.56, which is very high and seems extremely attractive at first glance. However, here are three reasons I’m avoiding this REIT, as I believe the high yield may represent a value trap.
1. History of declining DPU
The table above shows the five-year history of distribution per unit (DPU) for the REIT. Note that of the five years (2014-2018), only one year (2015) showed positive year-on-year growth in DPU. DPU has been steadily declining from 2016 through to 2018. For the first two quarters of 2019, it looks like the trend is continuing, as Q1 2019 recorded a 9.5% year-on-year fall in DPU while Q2 2019 saw a 6.7% year-on-year decline. If this trend continues, 2019 will be on track for Soilbuild’s fourth consecutive year of falling DPU.
2. Negative rental reversions
Soilbuild recorded negative rental reversions of 2.0% and 6.9%, respectively, for renewed and new leases in Q2 2019. This implies that demand remains weak for the properties Soilbuild owns, resulting in downward pressure on rental rates. There could also be poorer demand due to an over-supplied industrial market regarding the assets the REIT owns, resulting in the REIT manager having to negotiate rents lower in order to retain tenants.
3. Client default — NK Ingredients Pte Ltd
On 3 July 2019, the manager announced that NK Ingredients Pte Ltd (NKI) had defaulted on its July 2019 rent. Another creditor has petitioned for NKI to be placed under judicial management (JM), and the REIT announced on 20 August that the court granted it. NKI owes Soilbuild S$3.39 million, which exceeds NKI’s security deposit to the REIT by S$835,000.
In previous announcements concerning NKI, we learned that S$272,000 represented about half a month’s rent, meaning one month’s rent is around S$544,000. Gross revenue per quarter for the REIT for Q2 2019 was S$22.4 million, for an average of S$7.45 million per month. Therefore, NK Ingredients takes up around 7.3% of gross revenue, which implies that this level of gross revenue is at risk of not being recoverable.
Be wary of high historical dividend yields
Investors need to be wary of REITs with high historical dividend yields as this may indicate a potential decline in dividends moving forward. The share price will usually adjust early on to account for this decline, which makes the historical yield seem high. However, with a history of declining DPU, negative rental reversions, and a client placed under JM, there are valid reasons to avoid this REIT.