Soilbuild Business Space REIT - DBS Research 2016-01-22: Driven by acquisitions

Soilbuild Business Space REIT - DBS Research 2016-01-22: Driven by acquisitions SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Soilbuild Business Space REIT - Driven by acquisitions 

  • 4Q15 results boosted by acquisitions 
  • Revising rental reversion; occupancy assumptions to account for weaker operational outlook 
  • Maintain BUY, TP S$0.84 

4Q15 results boosted by acquisitions (IN LINE). 

  • 4Q15 Gross Revenue and Net Property income of S$20.4m (+15.6%) and S$17.5m (+17.1%). This was mainly driven from an expanded portfolio – contributions from Technics, Speedy-Tech and KTL Offshore. 
  • Stripping off contributions from these acquisitions, the portfolio organic growth would have been fairly flattish. 
  • Interest costs increased mainly due to additional loans taken to fund its acquisitions. However, average cost of debt remained slightly lower at c. 3.21%, with interest coverage ratio at a healthy 4.8x. 
  • CREIT has hedged in a substantial > 90% of interest rates into fixed rate. 
  • 4Q15 DPU of 1.614 Scts (+1.8% y-o-y) on top of a 17.1% rise in distributable income. This is mainly due to the increased share base from the placement back in 1Q15. 
  • For FY15F, SBREIT delivered a total DPU of 6.487 Scts (vs 6.4 Scts est. by DBS). 

Balance sheet 

  • Portfolio saw a revaluation gain of S$4.5m; NAV remained stable at S$0.80. 
  • SBREIT’s gearing remain stable at 36% (within management comfortable range of 35-40%) 

Thoughts on Results. 

Rental reversions appear mixed despite an uplift in average rental 

  • 4Q15 leasing update appear mixed with renewals for seven leases (197k sqft) seeing a 6.6% drop in rents ( from an average of S$1.50 psf to S$1.40 psf). 
  • For the full year, SBREIT managed to achieve a tenant retention rate of c.63%, with an average c.2.5% uplift in rents for renewal leases. 25% of revenues are exposed to the Oil & Gas, Marine & Offshore segment. 
  • We are mindful that SBREIT has close to 25% of its income exposure to the Marine Offshore (11.2% of revenues) and Oil & Gas (13.9% of revenues), which could be at risk due to the declining oil prices impacting business activities. 
  • However, at this point, we understand that there has been no major signs of arrears from these tenants. 

WALE of 4.8 years (by ross rental income) 

  • A total of 14.9% of its NLA will be expiring in FY16 and SBREIT has forward renewed close to 2.3% of it. 
  • The remainder will mainly come from West Park Biz Central, Eightrium and Tuas Connection and we note that expiring rent levels there are in line with market. 
  • As such, we expect rental reversions to remain fairly flattish/negative. 

Tweaking rental reversion forecasts 

  • In view of competition from heightened supply completion, we have moderated our rental reversions (from 0% to -2%) and occupancy assumptions (99% revised down to 98%), resulting in a slight dip in our DPU estimates. 
  • TP is adjusted to S$0.84 (vs S$0.88 previously as a result). 

BUY call maintained, TP S$0.84 

  • Despite a dip in TPs, we continue to see value in SBREIT at 0.9x P/bk, offering a yield of 8.4%. 
  • Maintain BUY.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | Singapore Research Team DBS Vickers | 2016-01-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.84 Down 0.88