Soilbuild Reit FY2015 – Results and Opinion

SR

Soilbuild Business Space Reit (SV3U) released their results for FY2015 yesterday as I just purchased several lots of this counter at $0.725 as per my strategy for this bear market.

Fortunately for me, the results were quite satisfactory as distribution per unit (DPU) increased by 4.7% year-on-year to 6.487 cents. This brings my annualized distribution yield to 8.9%. The dividend yield is really great assuming they maintain their current performance for FY2016. Business fundamentals remain strong with increment of 16.4% and 18.2% in gross revenue and NPI respectively; Decent occupancy rates at 96.8% with an average Weighted Average Lease Expiry (WALE) at 4.8 years. Additionally, in response to a higher interest rate environment, the management has fixed 97.9% of interest bearing loans through medium-term notes / currency swaps. Gearing is around 38%.

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Soilbuild Reit portfolio includes 2 business park buildings and 9 factories. One concern I have is regarding the heavier allocation of master leases to marine/offshore and oil/gas tenants. As we all know, the two industries are plagued by low demand and the poor economic outlook, so it is not really known if they are able to tide through the current environment.

Also, the management acknowledged the fact that the industrial property sector faces a challenging operating environment with a slowdown in the manufacturing sector. I’m assuming what this means is that they might not be able to achieve a high rental rate with renewal/new leases. In Q4 FY2015, it is shown that there is rental reversion of -6.6%.

Well, I am placing these issues at the back of my mind as the management seems confident to maintain stable and growing cash flow from the master leases. They mention that risk mitigation measures are in place through 6-18 months rental deposits from the lessees and that organic growth is expected through occasional rental escalations. So for now, I am just glad they are able to consistently provide stable dividends and hoping for this to be one of my core investment positions for the years to come.