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.

 

5 thoughts on “Soilbuild Reit FY2015 – Results and Opinion

  1. Read the financial statement carefully. A very substantial portion of 2014 and 2015 dividend comes from increase of fair value of properties, drawing from cash reserves. This inflates the DPU very significantly and is not sustainable as fair value change of property is a non-cashflow item and can be positive or negative. Most reits treats change in fair value of properties as only a P&L item that has no impact on distribution as fair value change is a non-cashflow item.

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    • Hi there, thanks for the reply. As you can see, I’m still quite inexperienced at this. If you may advise, from the financial statements – FY2015 fair value change is $4.5m compared to FY2014 at $900k, however FY2015 NPI is $67.7m compared to FY2014 at $57.3m. Though there’s an increase of $3.5m in the property fair value, NPI has increased much more by $10m. Other factors such as higher finance expenses and manager fees are some reason for lesser distributable income , but they seem like a one-time fee since there’s no major refinancing till 2018 and the manager fee is adjusted according to performance of the REIT. However, what you say makes sense too as I find considering the fair value change as a component of distribution income confusing as well, as the fixed asset/property isn’t actually liquidated (or is it?). Perhaps a dividend of 8.9% isn’t sustainable, but I’m assuming minimally ~7% still is?

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      • To be frank, I spent quite a fair bit of time trying to make sense of the financial statement which I feel is quite opaque compared to the much clearer financials of AIMS AMP Reit (which I also have a stake in). Too many items are left unexplained sufficiently. Net Income, ie, NPI less finance expense (which I take as mostly loan interest), manager’s fees, trustee’s fees and trust fees seems to me to be a fair ballpark figure of what should be distributed, for FY 2015 is only at $47,124m. It’seems strange to me for them to add change in fair value ($4.535m) and Nett effect of non-tax deductable items ($6,208m) to arrive at the distribution figure of $57.867m. Granted Net Income may have some one-off expenses deducted but looking at the details of what’s deducted, I doubt the one-offs are significant. Finally another thing that does not make sense is the NAV pershare remains at at $0.80 despite the increase in fair value of $4.535m which should result in NAV pershare to rise approximately $0.005. This is the final smoking gun that led me to conclude that the change in fair value is paid out in the distribution.

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      • Just occured to me SB Reit did private placement in April 2015 that could have effect on NAV. However, private placement was at $0.805 which is above the FYE 2014 of $0.80. So the fact that FYE2015 remains the same at $0.80 despite fair value increase of $4.535m seems to indicate this increase is paid out as distribution.

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      • Interesting, so if you were to entirely omit the fair value change in property of $4.5m($0.005 per unit) from the dividend payout ($0.06487), it means the real-value DPU for FY2015 is 5.9 cents. This is 0.1 cent lower than FY2014 even after discounting the fair value increment and translates to a dividend yield of 8.2% (@ $0.725). Though this is comparably lower than what I initially thought, its kind of relieving that its still hovering around 8%. Anyway, if they are going to include this fair value increase every year in the statements, I suppose that’s some form of sustainability in itself, but the increment figure is still anyone’s guess. I’m trying to see it as an additional bonus to the base distribution figure derived solely off NPI.

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