Soilbuild Business Space REIT - Phillip Securities 2015-10-14: Occupancy risk exists, but acquisitions should stabilise DPU

Soilbuild Business Space REIT - Phillip Securities 2015-10-14: Occupancy risk exists, but acquisitions should stabilise DPU SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Soilbuild Business Space REIT - Occupancy risk exists, but acquisitions should stabilise DPU 

  • 11.8% of NLA up for renewal for the rest of the year, as of June 2015. 
  • Recent refinancing exercise has pushed nearest maturity to 2018. 
  • Three acquisitions completed recently should support DPU. 

Since we initiated coverage on Soilbuild Business Space REIT (SBREIT) in March earlier this year at S$0.80, the price for SBREIT had peaked at S$0.87 and has retraced to its current level. Investors would have received 3.248 Cents DPU for 1HFY15. SBREIT has also outperformed the benchmark Straits Times Index over the last three months. 

What is the news? 

  • SBREIT will be announcing its 3Q FY15 (Y/E Dec) results on 14 October after trading hours. We highlight the weak 3Q manufacturing indicators in a sector update and give an update of what to expect for 3Q15. 


 Improved debt maturity profile; next debt maturity will be in 2018. 

  • The Manager made an announcement and press release on 25 September 2015 on the refinancing of a S$185 million Club Loan. Weighted average all-in cost of debt has been reduced to 3.20% p.a. from 3.49% p.a. and weighted average debt maturity has been lengthened to 3.5 years from 2.4 years. 

 Well-positioned for inorganic growth through acquisition. 

  • SBREIT's gearing is currently at 36.3%, with a debt headroom of S$75 million based on a target leverage of 40% gearing. 

 Occupancy should remain high, but expect some non-renewals and flattish rental reversions due to the challenging operating landscape. 

  • Portfolio occupancy was 99.8%, as at end June 2015. Multi-tenanted buildings (Eightrium & Tuas Connection) were 100%-occupied, except for West Park BizCentral at 95.1%. SBREIT has 11.8% outstanding lease by NLA expiring in 2015. With the impending supply of industrial property coming on-stream in 2015 and 2016, tenants will be spoilt for choice and able to drive a hard bargain against landlords. 

 Gross Revenue and DPU are expected to have modest positive y-o-y growth. 

  • This is due to contributions from acquisitions: KTL Offshore, Speedy-Tech (both acquired in 4Q14) and Technics (acquired in 2Q15). 

Investment Actions 

  • We continue to like SBREIT for its exposure to niche Business Park spaces and its ability to grow its portfolio inorganically through acquisition with its remaining debt headroom. However, we lower our forecasts for FY15e and FY16e in view of the challenging operating landscape, downgrading SBREIT to "Accumulate" rating with lower DDM-backed valuation of S$0.91 (Previous: S$0.96).

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2015-10-14
Phillip Securities SGX Stock Analyst Report ACCUMULATE Downgrade BUY 0.91 Down 0.96