Soilbuild Business Space REIT is a S$626m small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how SV3U’s business operates and also how we should analyse its stock. In this commentary, I’ll take you through some of the things I look at when assessing SV3U.
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Funds from Operations (FFO) is a higher quality measure of SV3U’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For SV3U, its FFO of S$49m makes up 73% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for SV3U to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 10%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take SV3U 9.63 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times SV3U’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 3.27x, it’s safe to say SV3U is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at SV3U’s valuation relative to other REITs in Singapore by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In SV3U’s case its P/FFO is 12.7x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Next Steps:
Soilbuild Businessce REIT can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for SV3U: