Soilbuild Business Space REIT’s Latest Earnings: Management Sees Tough Times Ahead

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

As a brief background, the REIT has a portfolio of business parks and industrial properties. It currently owns 11 properties in Singapore, nine of which are industrial properties with the other two being business parks.

These properties are collectively valued at S$1.19 billion as of 31 December 2015 and have a net lettable area of 3.53 million square feet. Soilbuild Business Space REIT’s tenants are in a wide range of industries, such as 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 2016, Soilbuild Business Space REIT’s total gross revenue came in at S$19.57 million, a slight 0.1% lower than a year ago. But, net property income managed to grow by 3.7% S$17.33 million primarily due to a 22% reduction in property expenses.

Consequently, the REIT’s distributable income also inched up by 3% year-on-year  to S$14.7 million. But, its distribution per unit (DPU) had actually slipped by 3.1% to 1.565 Singapore cents due to an enlarged unit base as a result of the REIT issuing new units to pay for certain fees.

As of 30 June 2016, Soilbuild Business Space REIT has a book value per unit of S$0.79, unchanged from a year ago.

Financial position

Soilbuild Business Space REIT ended its fiscal second-quarter with an aggregate leverage ratio of 35.9%, a drop from the 36.3% seen in the same quarter a year ago.

With a self-imposed target aggregate leverage of 40%, Soilbuild Business Space REIT still has debt headroom of S$84 million which it can tap for use if needed. Investors may also want to note that REITs in Singapore have an upper gearing limit of 45%.

Meanwhile, the REIT’s average all-in interest cost stands at 3.44% currently, a slight decline from the 3.49% that was reported a year ago. Higher interest expenses could ding a REIT’s bottom-line and so changes in a REIT’s all-in interest costs may be of interest to investors.

Soilbuild Business Space REIT also saw its interest coverage ratio improve from 4.6 in the second-quarter of 2015 to 5.0 in the reporting quarter. In addition, the weighted average debt maturity had been lengthened from 2.4 years to 3.4 years.

Operational highlights

The REIT had ended the second-quarter of 2015 with a portfolio occupancy rate of 99.8%. But in the reporting quarter, the REIT’s occupancy rate had suffered a noticeable drop to 92.0%. Soilbuild Business REIT said that its occupancy rate is still higher than the industrial average of 90.1%.

The industrial property and business park owner reported a weighted average lease to expiry (by net lettable area) of 4.1 years in the second-quarter of 2016, down from the 4.5 years seen in the second-quarter of 2015.

Valuation and Prospects

In its earnings release, Soilbuild Business Space REIT said that factory activity in Singapore in June 2016 has contracted for 12 months in a row since June 2015. The REIT added:

“With the slowdown in the manufacturing sector, rentals of all industrial properties softened by 2.7% in 1Q 2016 over the preceding quarter. Indices for multi-user, single-user factories, business park and warehouse contracted by 3.7%, 2.1%, 1.0% and 0.8% from the previous quarter respectively.

With the slowdown in the manufacturing sector which resulted in a soft leasing environment, the portfolio occupancy has dipped to 92.0%3 at end of 2Q FY2016 as compared to the industrial average of 90.1% as at 1st Quarter FY2016. 86.0% of FY2016 lease expiries were due for renewal in the 1st Half of 2016.

The challenge remains to relet the vacant space and to renew the multi-tenanted leases that are expiring for the rest of the year which makes up 2.0% of the portfolio’s net lettable area.”

Soilbuild Business Space REIT’s units closed at a price of S$0.70 each yesterday evening. At that price, the REIT has an annualised yield of 8.9% and is valued at 0.9 times its latest book value.

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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.