RISK: TENANT DEFAULT

Potential Issue: Tenant may fail to pay their rent and outgoings which could affect returns.

Mitigation of Risk: Where possible have a Personal Guarantee over the tenant or Limited Bank Guarantee | Strong management and communication occurs to identify if a risk will occur. 

RISKS: NON-RENEWAL OF LEASE

Potential Issue: Tenant does not renew and the building becomes empty. It could take six months to re-lease and costs will be incurred for holding the premises without income | There could be additional costs renewing the lease such as leasehold improvements and rent holidays

Mitigation of Risk: Buy in areas of strong demand | Ensure the renewal notification clause is monitored early to give time to prepare for finding new tenants, and if vacating start the process early -for example, by speaking to real estate agents | Spread the risk by holding a number of properties within the Simply Industrial portfolio

RISK: COVID, CLAUSE 27.5 ADLS LEASE AND NEW GOVERNMENT REGULATIONS ON ASSISTING TENANTS

Potential Issue: Tenant may invoke their right and potentially cause lower returns

Mitigation of Risk: As responsible and fair landlords Simply Industrial must work with the tenants to come to a suitable solution | Where possible have essential service tenants who may still be affected by lock-downs but to a lesser extent and to demand high compensation or abutment of rent

RISK: INTEREST RATES INCREASE

Potential Issue: ≤40% of the purchase prices will be bank debt | Changes to LVR’s, bank margins, OCR, and bank’s compliance rules could affect interest rates

Mitigation of Risk: Mitigation of Risk: Fix bank debt/interest rates eg interest only or potentially floating: depending on the situation the Boardsviews at the time | Where possible take-out interest only loans for lower debt servicing costs | Simply Industrial is more concerned with a positive cashflow than interest rate hikes!

RISK: MAINTENANCE COSTS

Potential Issue: There could be expenses, such as HVAC system upgrade, and new roofs

Mitigation of Risk: Some of these potential costs can be identified at purchase (for example during the due diligence and any foreseen costs factored into any purchase whether in the price paid or budget forecast)

RISK: INCREASE IN OPEX OPERATING EXPENSES

Potential Issue: Increase insurance and rates

Mitigation of Risk: Where possible we have net leases where tenant pays all outgoings and therefore risk sits with the tenants

RISK: FORECASTS

Potential Issue: Market conditions change in view of cyclical or international influences, and this may cause negative influences on the forecasts of the company and property values

Mitigation of Risk: Directors’ experience, will, to the best of our ability, mitigate any risk. Investors are encouraged to seek their own expert opinion (for example lawyers and accountants) before investing in Simply Industrial. No warranties or guarantees are given in respect of the future returns, expenses and capital appreciation to investor

RISK: DAMAGE TO BUILDINGS

Potential Issue: Such as flood or earthquakes

Mitigation of Risk: A minimum earthquake rating of 67% applies to any building purchased | Adequate insurance cover for unforeseen damage and destruction to buildings is obtained including coverage for any lease tenant conditions.

RISK: GUARANTEE OF CAPITAL GROWTH OF THE BUILDINGS

Potential Issue: There is no guarantee of capital appreciation of the properties owned by the company

Mitigation of Risk: Mitigation of obvious risk can be achieved by the strength of the leases in place with annual increases and market reviews regularly. Any market rent reviews will increase the value of the building as per the yield. This is often determined by the strength of the lease in regard to rent reviews, term of the lease and yearly rate increases where possible

RISK: OBSOLESCENCE OF THE BUILDING

Potential Issue: In time each building’s demand for its use may change

Mitigation of Risk: This is one reason why Simply Industrial is focused on the industrial market. This market has had a proven demand over many decades. It is expected to have continual demand in view of capital expenditure undertaken in New Zealand and in the growth of e-commerce. Therefore Simply Industrial will not invest in office commercial properties such as Banks. It will also avoid specialised properties (for example food industry, unless buildings can be converted to general industrial, should a tenant not renew their lease). For example Vogel Street Naenae, in our portfolio, was originally an industrial building

RISK: GOVERNMENT INTERFERENCE IN COMMERCIAL REAL ESTATE

Potential Issue: Commercial real estate is not subject to the same bright-line tests as the residential market, and interest is still able to be deducted. This is the same as depreciation.

Mitigation of Risk: Simply Industrial’s position is that regardless of Government intervention the industrial market will stay a very attractive investment. This is shown with the new residential investment changes not correcting residential values to the level some expected