Soilbuild Business Space REIT Preview

Soilbuild Business Space REIT ("Soilbuild REIT") lodged its preliminary prospectus here. The founder is one smart guy. He privatized the company a few years back (I heard made hundreds of millions in the process) and then relaunched it with 2 IPOs! One for the construction business and now for the REIT business. 

I am considering whether i should put in a bid for the placement tranche, hence the preview. Do note that this is the first IPO to be launched this year without cornerstone investors. The news is here.

Soibuild REIT is offering 586.532m units at an offering range of $0.77 to $0.80 per Unit (subject to over-allotment of 56.307m units). The allocation between placement and public tranche is not finalized yet but the indicative number is 499.032m for placement and 87.5m for Public.

Principal Business

This is a Singapore REIT focused on investing in a portfolio of income-producing real estate in the industrial space.

Soilbuild's initial portfolio

The initial portfolio consists of seven properties with a purchase price of $921m. The location of the properties is in the picture above.

What I like about Soilbuild REIT

• Longest weighted average leasehold term of around 50.5 years vis-a-vis its listed competitors
• 42% of net income covered by Master Lease agreement to ensure yield stability
• Rental escalation features in 4 of the properties ranging from 2% to 4.5% and a long term lease contract. (See below)
  

• 343,240 square foot of GFA available through plot ratio maximization or popularly known as asset enhancement opportunities.
• ROFR of 4 properties from Sponsor
• The final purchase price of $921m is based on the average of Collier's valuation of $932m and CBRE valuation of $911m. This is, in my view, fair although i will definitely prefer to see the IPO priced at the lower end of the book-building range as the purchase price of $897.4m will then be at a slight discount to the more "conservative" CBRE's valuation of $911m.

My concerns 

• Over-saturation of Industrial REITs in the market
• New government regulations in this sector may dampen demand and yield
• Interest not aligned as the public will hold between 73%~80% of the REIT with the founder, Mr. Lim Chap Huat holding the remaining (depending on whether the over-allotment is exercised in full). The Sponsor will no longer be vested.
• Financial engineering? The implied yield is actually much lower if the manager has elected to be paid in cash for FY2013 and FY2014. If 100% of the management fees are paid in cash, the yield would have dropped to 6.7%-6.9% for 2013 and 6.8%-7.1% for FY2014. (I don't really like this!).

Forecasted Yields

The annualized yield will range between 7.3% to 7.6% for 2013 and 7.5% to 7.8% for FY 2014 (depending on the final offer price). The NAV of Soilbuild REIT is $0.80 per unit and the leverage at IPO is approximately 29.9%.

Peers'valuation

Let's see how the peers are trading as of 2 Aug. Source is here.

Looking at how the IPO is priced, it is probably 'fairly valued' based on the peers' valuation with slight upside potential if we treat Sabana REIT as a outlier. 

Mr IPO's views

While i like the "longest" leasehold life among its peers, I don't really like the "financial engineering" part by the fund manager to enhance yield for FY2013 and FY2014.  However, having said that, i think there is some slight upside potential given the positive market sentiments for IPOs recently. 

Assuming the fair trading range for Soilbuild REIT is a yield of between 7% to 7.5% , the fair value will be between 78c to 83c. If i use a price to book of between 1.0x to 1.1x, the value will range between 80c to 88c.

I will give it a 1 Chill rating for the IPO and subscribe only if you are interested in this sector and the projected yield. Don't expect to see much fireworks unless we can see some interesting names anchoring the IPO.