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 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).

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%)

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.

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.

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).

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 | http://www.dbsvickers.com/ 2016-01-22

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.84 Down 0.88