Soilbuild Business Space REIT's (SGX: SV3U) 12% Dividend Yield: Is It High for a Reason?
Sudhan P●
Soilbuild Business Space REIT‘s (SGX: SV3U) unit price is S$0.34 right now.
At that price, according to the Seedly REITs tool, Soilbuild Business Space REIT (or Soilbuild REIT for short) is valued at a price-to-book (PB) ratio of 0.6 and has a distribution yield of close to 12%.
At a cursory glance, Soilbuild REIT looks cheap.
But is that really the case?
Let’s find out using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Soilbuild REIT owns 14 business space properties in Singapore and Australia. Four of those properties are business parks, while the remaining 10 are industrial assets.
Together, the properties have a total gross floor area of around 4.6 million square feet and are valued at S$1.38 billion, as of 31 December 2019.
In Singapore, the REIT’s properties are located mostly in the western part of the island.
The following is a snapshot of the properties located in Australia:
Soilbuild REIT is managed by an external manager, SB REIT Management Pte Ltd, a wholly-owned subsidiary of Soilbuild Group Holdings Ltd, an integrated property group based in Singapore.
The sponsor of Soilbuild REIT is Lim Chap Huat and his immediate family members, who collectively hold 29.6% of the REIT.
Lim is the co-founder of Soilbuild Group and a controlling shareholder of Singapore-listed Soilbuild Construction Group Ltd (SGX: S7P), which undertakes construction activities.
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
Firstly, let’s look at how Soilbuild REIT’s gross revenue and NPI have been over the last five years (the REIT has a 31 December year-end).
| FY2015 | FY2016 | FY2017 | FY2018 | FY2019 | Compound annual growth rate (CAGR) | |
|---|---|---|---|---|---|---|
| Gross revenue (S$' million) | 79.3 | 81.1 | 84.8 | 83.8 | 89.1 | 2.9% |
| Net property income (S$' million) | 67.8 | 70.7 | 73.5 | 69.9 | 71.0 | 1.2% |
Soilbuild REIT’s gross revenue and NPI show an upward trend, albeit at a slow pace.
Verdict: Pass
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
Here, let’s explore Soilbuild REIT’s DPU performance.
| FY2015 | FY2016 | FY2017 | FY2018 | FY2019 | CAGR | |
|---|---|---|---|---|---|---|
| Distribution per unit (Singapore cents) | 6.487 | 6.091 | 5.712 | 5.284 | 4.220 | -10.2% |
The REIT’s DPU trend is ugly as it has been decreasing steadily from FY2015 to FY2019.
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
For FY2019, Soilbuild REIT had an NPI of S$71.0 million and a portfolio value of S$1.39 billion. This translates to a property yield of 5.1%.
Soilbuild REIT just passes this criterion.
Verdict: Pass
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, Soilbuild REIT’s gearing ratio stood at 38.2%, which is below my threshold of 40%.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
Soilbuild REIT had an NPI of S$71.0 million and finance expenses of S$17.4 million for FY2019.
Given those figures, the interest coverage came in at 4.1x for the year, which doesn’t meet my criterion.
Verdict: Fail
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
As of 31 December 2019, Soilbuild REIT had an occupancy rate of 84%.
The occupancy rate has been falling over the years, down from 96.8% in 2015 to 89.5% in 2018, and declining even further in 2019.
Verdict: Fail
7. Rental Reversion Check
Check for: Positive rental reversions
For FY2019, Soilbuild REIT’s rental reversion was a negative 2.5%, which doesn’t bode well for the REIT’s DPU going forward, assuming no change in the portfolio make-up.
Verdict: Fail
8. Growth Prospects Check
Soilbuild REIT said in its 2019 fourth-quarter earnings release that it will continue working “towards improving our portfolio quality through asset enhancement initiatives and recycling of capital through divestment of under-performing assets” this year.
The REIT completed the acquisition of 25 Grenfell Street in Adelaide, Australia, late last year, and it should start contributing fully from this year onwards. The property is a multi-tenanted freehold Grade A office building located at Adelaide’s central business district.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At Soilbuild REIT’s unit price of S$0.34, it is valued at a PB ratio of 0.57x.
Over the past five years, its average PB ratio stood at 0.9x.
At 0.6 times its historical book value, which is below average, Soilbuild REIT looks undervalued at the moment.
Verdict: Pass
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At Soilbuild REIT’s unit price of S$0.34, it has a distribution yield of 12.4%, which is well above my criterion of 5%.
Verdict: Pass
The Final Verdict
Soilbuild REIT has a final score of 6/10.
Even though the REIT shines in many areas, including having a low valuation, I’m uncomfortable with its falling DPU and occupancy rate.
Soilbuild REIT’s net asset value (NAV) per unit has also trended down from S$0.80 in FY2015 to S$0.59 in FY2019. This suggests that unitholder value is not growing.
Therefore, I wouldn’t invest in Soilbuild REIT.
What Are Your Thoughts on Soilbuild REIT?
Come discuss them and more in our Seedly Community under a page specifically dedicated to Soilbuild Business Space REIT (SGX: SV3U).
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
