Soilbuild Business Space REIT - Phillip Securities 2016-01-25: A steady year driven by acquisitions

Soilbuild Business Space REIT - Phillip Securities 2016-01-25: A steady year driven by acquisitions SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Soilbuild Business Space REIT - A steady year driven by acquisitions 

  • Positive rental reversions on a full year basis, despite the negative reversions in 4Q15. 
  • No refinancing until 2018, resulting in weighted average debt maturity of 3.2 years. 
  • 1.614 cents distribution for 4Q15; in line with expectations.


 Manageable risk from Technics Offshore. 

  • The trading of shares of Technics Oil & Gas, the Parent of Technics Offshore Engineering, has been suspended since 6 January. 
  • The Manager said that the Tenant, Technics Offshore Engineering, is not in arrears and has been prompt in making payments. 
  • The Manager does not expect any problems in collecting rent from the tenant. Furthermore, 18 months security deposit had been collected at the commencement of the lease. 

 Committed to maintaining portfolio occupancy. 

  • Against the backdrop of higher supply of space in the market, the Manager highlighted that it is imperative to retain tenants, as it would be difficult to find new tenants to fill vacated space. As such, the Manager is prepared to lower rents in order to retain tenants. 

 Possible acquisition of Bukit Batok Connection. 

  • The Manager guided that acquisition of Bukit Batok Connection from the Sponsor's (Soilbuild Group Holdings Ltd) Rights of First Refusal (ROFR) pipeline could happen in 2016. 
  • Bukit Batok Connection is a 9- storey light industrial ramp-up building which received its TOP on 20 May 2015. Tenants are gradually filling up the property. The Property has a NLA of 377,776 sqft and would increase the existing portfolio's NLA by about 11%. 

How do we view this? 

 Acquisitions will be key in 2016. 

  • After an acquisition-driven year of DPU growth in 2015, our financial model shows that y-o-y DPU growth will be flat/negative from 2Q16 onwards, as all the acquisitions would have completed a full 4-quarters of contributions, except for Technics Offshore, which was acquired in 2Q15. 
  • Moreover, we believe that supply pressures of industrial space will result in flat/negative rental reversions in 2016. 
  • Recall that the Manager's fee structure is strongly aligned with unitholders' interest – Base Fee is pegged to Distributable Income, while the Performance Fee is pegged to y-o-y DPU growth. 
  • If left at status quo, our model shows that the Manager would not be earning any performance fee in 2016. As such, the REIT Manager is incentivised to make an acquisition in 2016. 

 Investment Actions 

  • We roll forward our forecasts and raise our cost of equity to 7.4% (derived from CAPM). 
  • We maintain our "Accumulate" rating with lower DDM-backed valuation of S$0.86 (S$0.94 previously). 
  • Forward dividend yield of 7.9% and implied forward P/NAV multiple of 1.04x look attractive. 
  • SBREIT is also currently trading at -2 standard deviations below its historical average P/NAV multiple.

Richard Leow CFTe Phillip Securities | 2016-01-25
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.86 Down 0.94