Soilbuild Business Space REIT is a S$629m small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess SV3U.
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A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much SV3U actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For SV3U, its FFO of S$66m makes up 102% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether SV3U has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take SV3U to pay off its debt using its income from its main business activities, and gives us an insight into SV3U’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take SV3U 7.1 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 4.27x, it’s safe to say SV3U is generating an appropriate amount of cash from its borrowings.
In terms of valuing SV3U, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. SV3U's price-to-FFO is 9.58x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.