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Soilbuild Business Space REIT’s Latest Earnings: Stable Growth Ahead?

Soilbuild Business Space REIT (SGX: SV3U) released its fiscal second-quarter earnings yesterday evening.

The real estate investment trust, which got listed only in August 2013, has a portfolio of two business parks and nine industrial properties located in Singapore. These properties serve a wide range of industries including manufacturing, engineering, logistics, electronics, research & development, and more.

With that, let’s dive into the REIT’s latest set of quarterly figures.

Some basic numbers

For the quarter ending 30 June 2015, Soilbuild Business Space REIT’s total gross revenue came in at S$19.59 million, up 17.2% from a year ago mainly due to acquisitions that were completed in 2014 and in the first half of 2015.

Consequently, the REIT’s net property income had jumped by 19% year over year to S$16.7 million.

With expenses which increased roughly in line with gross revenue, Soilbuild Business Space REIT ended the quarter with distributable income of S$14.3 million, up 17.9% from a year ago.

But as a result of a private placement done on 5 May 2015 where 111.8 million new units of the REIT were issued, Soilbuild Business Space REIT’s distributions per unit (DPU) only managed to grow by 7.7% year over year to 1.615 Singapore cents.

The net asset value (total assets minus total liabilities) per unit of a REIT can be a good proxy for its underlying economic value; as such it’s an important figure for investors to track. Soilbuild Business Space REIT ended 30 June 2015 with a NAV per unit of S$0.79, down slightly from S$0.80 seen a year ago.

Financial position

Having done a number of acquisitions over the past 12 months, Soilbuild Business Space REIT ended its fiscal second-quarter with an aggregate leverage ratio of 36.3%, a sharp increase from the selfsame figure of 30.3% that was clocked in the second quarter of 2014.

With a self-imposed target aggregate leverage of 40%, Soilbuild Business Space REIT still has debt headroom of S$75 million which it can tap for use if needed.

But that said, it should be noted that the Monetary Authority of Singapore had recently made changes to REIT regulations which will come into effect in phases starting from 2016. One of the changes concerns REIT’s borrowing limits; under the new framework, a REIT will only be allowed a leverage ratio of 45% of its total assets. This is something for Soilbuild Business Space REIT’s investors to keep an eye on, lest the REIT starts running too close to the edge.

Meanwhile, the REIT’s average all-in interest cost stands at 3.49% currently, a noticeable increase from the selfsame figure of 3.08% that was reported a year ago. Higher interest expenses can ding the REIT’s bottom-line and so this bears watching from investors.

The debt-maturity profile of a REIT is another important aspect of a REIT’s financial picture that investors may want to observe. Having a huge chunk of debt mature within a narrow timeframe may cause financial difficulties for a REIT should the credit markets take an unexpected turn for the worse.

In the case of Soilbuild Business Space REIT, it has a well-staggered debt-maturity profile (see table below).

Year Percentage of debt maturing (amount)
2016 21.7% (S$95 million)
2017 20.6% (S$90 million)
2018 35.4% (S$155 million)
2019 22.3% (S$97.5 million)

Source: Soilbuild Business Space REIT’s earnings presentation

Soilbuild Businses Space REIT is currently in discussions with its lenders to refinance the loans due in 2016 and 2017 “in order to benefit from lower margins and extend the debt maturity to 2020.” But with the possibility of a rising interest rate environment in the future, investors may want to keep an eye on the progress of the refinancing and the new terms the RETI may be getting for its refinanced borrowings.

Operational highlights

A year ago, the REIT ended the second quarter of 2014 with a strong portfolio occupancy rate of 98.5%. But in the reporting quarter, the REIT has one-upped that performance with an occupancy rate of 99.8%.

During the quarter, the RET also managed to enjoy a positive rental reversion of 5.0% and 1.6% for its renewal leases and new leases respectively.

Investors might also be pleased to know that Soilbuild Business Space REIT has managed to lengthen its weighted average lease to expiry (by net lettable area) from 3.8 years in the second quarter of 2014 to 4.5 years in the reporting quarter. A longer WALE helps bring income stability to the REIT.

Going forward

In the earnings release, Soilbuild Business Space REIT’s Manager commented that the “industrial property market in Singapore continues to face a challenging operating environment with issues such as historically high new supply and a weak macro-economic outlook putting pressure on rentals and occupancy.”

But, the REIT’s Manager sounded a brighter note about Soilbuild Business Space REIT’s own prospects, stating that “leasing activities in [the second quarter of 2015] progressed well, confirming the attractiveness of our properties.”

The REIT’s focus for the year will now be on the leases that are expiring in the second half of 2015 (some 400,000 square feet; the REIT’s portfolio has a total net lettable area of 3.53 million sq ft). The Manager of Soilbuild Business Space REIT expects the REIT’s “portfolio to maintain a stable performance” for the whole of 2015.

With a closing price of S$0.86 yesterday, Soilbuild Business Space REIT has an annualised yield of 7.6% (based on annualising its DPU of 3.248 cents for the first half of 2015). The REIT’s also valued at 1.1 times its latest book value at that price.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.