DBS Group Research 2015-07-16: Soilbuild Business Space REIT - Occupancy is key. Maintain BUY.

Occupancy is key 


  • 2Q15 DPU of 1.615 Scts in line 
  • Locking in forward renewals; performance to remain stable as the manager actively manages leasing risks 
  • Maintain BUY, TP of S$0.95 as we roll forward valuations 


Highlights 


2Q15 DPU of 1.615 Scts in line. 

  • Gross revenues and net property income rose by 17.2% and 19.0% respectively. 
  • The better operational performance was driven by the recently completed acquisition of 72 Loyang Way, supported by stable portfolio occupancies of 99.8%. 
  • DPU of 1.615 Scts grew by a lower 7.7% y-o-y largely due to increase in number of units post placement exercise. 

Stable operational performance. 

  • Portfolio remained stable with steady occupancy rates of 99.8%. 
  • The trust renewed and signed new leases at rental reversions of between 1.6-5.0%, which is at a modest rate compared to 1Q, but in line with expectations, given the current tough operating climate. 

Interest costs to edge up. 

  • SBREIT is actively managing its debt expiry profile and is in active discussions to term out its debt till 2019-2020. The manager expects interest costs to rise by c.20bps from the current rate of 3.49% post refinancing, given rising hedging costs. 
  • We have tweaked our interest forecasts higher marginally to account for this update. 

Outlook Acquisitions to continue growing portfolio. 

  • Apart from 3rd- party opportunities that the manager might be reviewing, we believe a medium target could be the acquisition of 566 Bukit Batok St 23, a light industry property which is estimated to be completed in 1Q15. 
  • With gearing at c.36.1%, SBREIT has further headroom of S$50m of debt-funded acquisitions to reach c.40% gearing. 
  • Thereafter, we believe that an EFR could be needed to partly fund any further meaningful acquisition opportunities. 

Forward renewal of expiring leases. 

  • The manager has forward renewed expiring space in 2015 and is left with 11.8% of its NLA of close to 413k sqft of space left to be renewed in 2H15. 
  • We understand that there are some non-renewals but the manager is optimistic that replacement tenants can be found. 
  • In addition, we are comforted by the fact that expiring rent levels are low relative to current market spot rent levels and thus rental renewals should be stable. That said, the manager is taking a more defensive strategy to maintain occupancy rates rather than hiking rents, which we believe will work well in this environment. 
  • We are maintain our 3-5% rental reversion forecasts. 


Valuation: 


  • Our DCF-backed TP is S$0.95 as we roll forward valuations. 
  • Supported by an attractive yield of >7.5%, we believe that at current levels, SBREIT offers an attractive total return of >15%. 
  • Maintain BUY. 


Key Risks: 


Higher interest rates. 

  • Any increase in refinancing rates will negatively impact distributions. The manager has put in place interest rate swaps of 1-4 years to essentially convert c.95% of its debt into fixed rates. 

Economic risk. 

  • A deterioration of the economic outlook could have a negative impact on industrial rents and occupancies as companies cut back on production and lease out less space. Industrial rents have a strong historical correlation with GDP growth.


(Derek TAN, Mervin SONG CFA; Rachael TAN)

Source: http://www.dbsvickers.com/




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