A Peon Analysis - Soilbuild Business Space REIT

I have never thought much of Soilbuild Business Space REIT (SB REIT) before.

However, I was chatting with another REIT investor a couple of days back and he mentioned that he saw potential in Soilbuild Business Space REIT (SB REIT).

Let me quote his exact words as to why SB REIT attracted his attention:

1) Founder of SB REIT's parent, Soilbuild Construction Group, has a pretty big stake in the REIT itself. Thus, his name is intricately tied to the Soilbuild name and substantially all his net worth. If Soilbuild fails, his entire empire he spent his whole life building comes crumbling down

2) Once the industrial sector recovers by 2019, its will rise easily to 70-75 cents

3) Not forgetting the 17% div for two years while waiting for the recovery

4) It's also underpriced compared to other industrial reits

5) Dividend will likely be maintained at current levels

Fwahhh. Once he said that, I took out my phone and googled for SB REIT and the first thing I saw was that its yield was an eye-popping 8.76%!

Waaa. I usually try not to be a dividend whore as much as possible, solely chasing yield only. But SB REIT is a damn attractive proposition with a yield of 8.76% and certainly deserve some degree of study man.

REIT Analysis Checklist  

Stockcode: SV3U.SI

Financial Analysis

1) Is the Purchase price lower or equal to Net Asset Value Per Share (NAVPS)?

Remarks: Purchase Price=$0.680,   NAVPS=$0.72,   Discount=5.88%

	50% lower than NAVPS	40%-50%  lower than NAVPS	30%-40%  lower than NAVPS	20%-30%  lower than NAVPS	10%-20%  lower than NAVPS	<10%  lower than NAVPS	Score Awarded
Score	12	10	8	6	4	2	2

2) Is the Gearing below 36%? 

Remarks: Gearing ratio = 37.5%

	Gearing Ratio more than 40%	Gearing Ratio 36%-40%	Gearing Ratio 31%-35%	Gearing Ratio 26%-30%	Gearing Ratio 20%-25%	Gearing Ratio less than 20%	Score Awarded
Score	6	8	10	4	2	0	8

3) Loan profile. (No. and types of lenders,  loan maturity, interest cover ratio, loan denominated in which currency, etc) 

Remarks: No refinancing required until 2018 and at current gearing, SB REIT will be able to absorb an additional debt of approximately $50mil.

Currently, loans are obtained from three different sources, namely the banks, Medium Term Notes, and interest free loan from sponsor.

The average interest cost currently sits at 3.37% p.a., with a interest cover ratio of 4.8x and overall average debt maturity of 2.8years.

86.5% of borrowings are fixed, with a weighted debt maturity of 1.9years.

Current cash and equivalent stands at $16.57mil (based on 2015 AR) in comparison to next refinancing of $155mil due in 2018.

Frankly, although the loan profile is not particularly worrying; it also does not install much confidence too. Of particular concern is the upcoming loan repayment of $155mil in 2018 where I am rather uncertain if SB REIT will be able to refinance at a lower interest rate.

	Strong	Neutral	Weak	Score Awarded
Score	5	2.5	0	2.5

4) Yield Per Year?

Remarks: Based on purchase price of $0.68 and 2016 DPU of $0.06091, Yield = 8.96%

	Yield more than 8%	Yield between 6% - 7.9%	Yield between 5% - 5.9%	Yield between 4% - 4.9%	Yield between 3% - 3.9%	Yield less than 3%	Score Awarded
Score	12	9	6	4	2	0	12

5) Any financial engineering involved to boost income?

Remarks: While not exactly a form of financial engineering, I discover that the multi-tenanted building, Solaris, which contributes to 26% to SB REIT income, is under a master lease structure. Under this arrangement, a subsidiary of the Sponsor, SB (Solaris) Investment Pte Ltd, acts as the master lease,  guaranteeing rental income to SB REIT with yield of 4.86% (after deduction of all property expenses) until Aug 2018, after which it might be subject to renewal, most probably with different lease terms.

Based on figures obtained from 2015 AR, the actual occupancy level of the Solaris is probably in the range of 97.4% instead of the 100% reported.

Despite a 3% annual escalation, I believe Solaris will be able to provide better yield than 4.86% if it is not under this Master Lease arrangement, due to expire by Aug'18.

Hence, it is of my opinion that this arrangement does not artificially inflate SB REIT's income.

It is also noted that another SB REIT property (Bukit Batok Connection), which contribute 9.2% to the gross rental income, is also under the master lease scheme with another subsidiary of the Sponsor, SB (Westview) Investment Pte Ltd. 

Under the master lease scheme, SB (Westview) Investment Pte Ltd will contribute $8mil per annum with a 2% annual rental escalation, for a period of 7years until FY2023. Based on the purchase price of $96.3mil, the annual yield of the property under this master lease scheme will be around 8.31%.

Due to the master lease scheme, the occupancy for Bukit Batok Connection has been artificially inflated to 100%. I am unable to obtain the actual occupancy for Bukit Batok Connection but I believe that with the current excess of industrial space, the actual occupancy should be somewhat lower than the 100% reported; thereby affecting the yield of 8.31% if it is not under the master lease scheme.

	Yes	No	Score Awarded
Score	0	3	0

6)Are the foreign currency risk sufficiently hedged?

Remarks: Incomes and Expenses indicated only in SGD.

	Yes	Not Applicable	No	Score Awarded
Score	5	5	0	5

7) Did the DPU improve for the last 5 years?

Remarks: FY2016-$0.06091   FY2015-$0.06487   FY2014-$0.06193
                  FY2013-$0.02270 (Only 2 quarters of distribution due to IPO) 

	DPU improve for 5 out of 5 years	DPU improve for 4 out of 5 years	DPU improve for 3 out of 5 years	DPU improve for 2 out of 5 years	DPU improve for 1 out of 5 years	DPU improve for 0 out of 5 years	Score Awarded
Score	12	9	6	4	2	0	4

8) Is the receivables too excessive compared to ' Cashflow from Operations'?

Remarks: As of 31 Dec'15, Trade receivables are at $2,436,000 while based on FY2015 Annual report, Cashflow from Operations are at $68,449,000. Hence, receivables are 3.56% of cashflow.

	Receivables <11% of Cashflow from Operations	Receivables 11% to 20% of Cashflow from Operations	Receivables 21% to 30% of Cashflow from Operations	Receivables >30% of Cashflow from Operations	Score Awarded
Score	6	4	2	0	6

Fundamental Analysis

9) Quality of Management

9a) Any directors with political connection?

Remarks: Although the founder, Mr Lim Chap Huat, is active in community service and has been conferred the PBM and BBM medals by the President, I am of the view that this does not provide much value-add to SB REIT.

	Yes	No	Score Awarded
Score	2.5	0	0

9b) Any directors with banking background?

Remarks: Mr Chong Kie Cheong (UOB, DBS).

	Yes	No	Score Awarded
Score	5	0	5

9c) Any directors with outstanding relevant experiences with respect to the industry in which the Company is involved in?

Remarks: Mr Michael Ng (Real Estate), Mr Lim Chap Huat (Property Development), Mr Eugene Paul (REIT)

	Yes	No	Score Awarded
Score	5	0	5

9d) If the Company has operations overseas, does the Company have any directors well-acquainted with the oveaseas' culture?

Remarks: No overseas properties.

	Yes	Not Applicable	No	Score Awarded
Score	2.5	2.5	0	2.5

10) Quality and diversity of tenants

Remarks: Only 2% of the gross rental income is derive from the oil and gas industry, which is under tremendous stress currently.

On another note, based on Q4 2016 presentation slides, I note that SB REIT has a very good diversified tenants base, encompassing tenants from a huge range of industry sectors with not a single sector contributing to more than 13% of SB REIT gross rental income.

	Strong	Neutral	Weak	Score Awarded
Score	2.5	1.25	0	2.5

11) Quality of lease (WALE, rental escalation, etc)

Remarks: Current WALE is 3.4 years and starting from FY2017, there will be a further tenants' lease expiry of 13.67%, with a further 25.3% in FY2018. This will be occurring during a period of oversupply in industrial/logistic space while enduring poor demand due to the slowdown in the manufacturing  sector.

In view of the current economic climate as well as the excess of industrial space, I would not be expecting positive rental reversion for the next 1-3years.

	Strong	Neutral	Weak	Score Awarded
Score	2.5	1.25	0	0

12) Occupancy level (in comparison to industry average)

Remarks: Portfolio occupancy stands at 89.6% as at 4Q 2016 while the industry average occupancy stands at 89.1% as at 3Q 2016.

While not an apple-to-apple comparison due to the different time frame, I believe that this is still a reasonable comparison as the time periods are near.

Hence, in comparison with the industry average, SB REIT occupancy is neither outstanding nor particularly weak.

	Strong	Neutral	Weak	Score Awarded
Score	5	2.5	0	2.5

13) Type and duration of property lease.

Remarks: With an average unexpired land lease of 44yrs and with more than 71.5% of the lease expiring more than 30yrs from 31 Dec'16 onwards.

At current yield of 8.96%, and further discounting it by 13.67% in view of the nos. of tenant's lease due to renewal in 2017, return on capital deployed will be between 12 to 13 years, thereby proving me with free money annually for at least 25 more years!

	Strong	Neutral	Weak	Score Awarded
Score	5	2.5	0	5

14) Is the market sector in which the Company is involved in, currently on a uptrend, stagnant or on a downtrend?

Remarks: Although industrial properties are facing some pressure from an oversupply (average 3.9mil sq ft of supply every year, estimated to last until FY2021), we have to bear in mind that such space only constitute  33% of SB REIT's portfolio.

On the other hand, business park properties (Eightrium and Solaris) constitute 33% of SB REIT's portfolio and there are no significant pipeline of business park space in the coming 5 years. Hence, there is possibility of an upside for business park space after this FY.

Therefore, although SB REIT is bound to be affected by the significant oversupply of industrial space in the coming 5years, it is somewhat mitigated by its 33% stake in business park space.

	Uptrend	Stagnant	Downtrend	Score Awarded
Score	2.5	1.25	0	1.25

15) Are the economies of the countries in which the Company has operations in, currently on a uptrend, stagnant or on a downtrend?

Remark: Singapore economic growth for 2017 will remain within the same range as 2016, which is in the low 1% to 3%.

1% to 3%? Bahh..That's stagnant to me.

	Uptrend	Stagnant	Downtrend	Score Awarded
Score	2.5	1.25	0	1.25

Total Score Awarded = 64.5 out of 100 Points

Not a particular strong indication for me to purchase SB REIT, given that it is only scores 64.5points in my analysis and I would much prefer to conserve my warchest at this point of time.

However, I will revisit this proposition again should it's share price drop to a level that is more appealing to me; somewhere in the range of $0.60 maybe?