Unitholders of Soilbuild Business Space REIT (SB REIT) had reason to cheer on Dec 14. Lim Chap Huat — founder and chairman of SB REIT sponsor Soilbuild Group Holdings — together with a unit of Blackstone Real Estate have teamed up in a joint venture which is 30.28% held by Lim and 69.72% held by Blackstone. Their aim: To take SB REIT private. The proposed privatisation and delisting of SB REIT is to be effected by way of a trust scheme of arrangement.

SB REIT owns 10 properties in Singapore and three in Australia. As part of the transaction, SB REIT’s three Australian properties will be divested to a unit of Blackstone. The exit price on offer is $0.55 per unit.

The price represents a premium of approximately 34.5%, 34.8%, 53.2% and 29.1% over the volume-weighted average price of $0.409, $0.408, $0.359 and $0.426 per unit respectively for the one-month, three-month, six-month and 12-month period up to and including Aug 31, 2020, being the last full trading day immediately prior to the holding announcement which had said the sponsor was in talks over a transaction.

The $0.55 per unit price implies a price to adjusted net asset value (NAV) multiple of 0.98 times to 1.00 times, which exceeds SB REIT’s historical one-year, three-year and five-year average NAV multiple of 0.78, 0.91 and 0.92 times respectively, as well as the average NAV multiple since SB REIT’s initial public offering of 0.94 times when it listed at $0.78 per unit.

The privatisation price is also above $0.53 per unit of its preferential equity fund raising (EFR) price which was offered to unit holders on the basis of 18 units for every 100 units in August last year. While the EFR was underwritten, it was non-renounceable. The $0.53 pricing represented a discount of 8.4% to the VWAP price of $0.5788 on Aug 21, 2019.

According to Roy Teo, CEO of SB REIT’s manager, getting unitholders to subscribe to their pro rata share in EFRs was a challenge when the transaction was not distribution per unit (DPU) and yield accretive.

“We wanted to have exposure to Australia and we [wanted] to buy quality assets in Australia but they did not yield accretively. Based on the results of the preferential equity offerings, investors still want yield accretion. Since shareholders want acquisitions to be yield accretive it is very difficult for us to move forward,” Teo says.

REITs trading at high DPU yields obviously have challenges making DPU and yield accretive acquisitions. “The REIT has some constraints because of high DPU yield. In particular we faced some difficulties making accretive acquisitions for the REIT. Hence growth has slowed. It’s very difficult to buy good stable assets with high DPU yield. All the good assets are trading at tight yields and we can only buy risky assets,” Teo adds.

SB REIT’s inability to grow via acquisitions resulted in a sub-optimal size for it to be noticed by institutional investors. “Growing SB REIT through acquisitions requires the trading yield to be sufficiently low to fund acquisitions. SB REIT’s assets have only grown 1.5x versus peers average of 1.8x and the REIT has a long way to grow before being included in key indices. The current free float is $381 million and there is a gap of [more than] $1 billion to be included in the FTSE EPRA NAREIT Developed Index,” says Soilbuild Group Holdings director Lim Han Qin.

“These have collectively contributed to SB REIT’s unit price underperforming the REIT index, a relatively low trading volume and low analyst following. Faced with this outcome, the sponsor has considered options to unlock value. We firmly believe that the proposal by Blackstone gives the best and the highest offer price and most credible offer in terms of timing,” Lim continues.

The extraordinary general meeting (EGM) for the scheme is likely to be held in March 2021. Unitholders will have to vote on three interdependent resolutions, to amend the trust deed, on the disposal of the Australian properties and for approval of the trust scheme. So far, unitholders appear to be satisfied with the scheme’s terms, suggesting that the resolutions are likely to be voted through.

Soilbuild REIT’s privatisation offer is likely to be met with approval from unitholders

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Soilbuild REIT’s privatisation offer is likely to be met with approval from unitholders

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