Soilbuild Business Space REIT - Phillip Securities 2016-04-18: Stability from master leases

Soilbuild Business Space REIT - Phillip Securities 2016-04-18: Stability from master leases SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Soilbuild Business Space REIT - Stability from master leases 

  • S$20.14mn gross revenue in line with consensus expectations of S$21.0mn. 
  • 1.557 cents DPU in line with consensus expectations of 1.61 cents. 
  • No refinancing until 2018, resulting in weighted average debt maturity of 3.6 years. 

Renewal leases achieved +6.6% rental reversion; New leases at Tuas Connection 

  • Of the 7 leases that were renewed, most of them came from West Park BizCentral where reversions were flat. 
  • The +6.6% reversion was mainly attributable to one renewal at Tuas Connection whereby the original lease was entered five years ago, when rents were lower compared to today. 
  • While there were some non-renewals from the Oil & Gas sector at Tuas Connection, the Manager managed to secure two new tenants from other sectors for the property. The occupancy at Tuas Connection is marginally lower at 86.3% now, compared to 93.5% a quarter ago. 
  • As there are a total of 15 units at Tuas Connection, we believe that there are now two vacant units at the property. 

Forward Renewals were flat at -0.6% 

  • There were two forward renewals – one each at Tuas Connection and Eightrium
  • The Manager guided that some rent incentive had to be given, in exchange for the certainty of the forward lease. This resulted in the slightly negative reversion. 

Exposure to Marine Offshore and Oil & Gas tenants is material; but risk is diversified and well-managed 

  • Referring to the figures on the next page, the exposure to Marine Offshore and Oil & Gas tenants is 23.5% of portfolio gross rental income (GRI), with them accounting for 11.2% and 12.3% respectively. 
  • The tenant exposure is diversified across seven properties, with 17% of GRI from 5 master leases, and the remaining 6.5% of GRI from 2 multi-tenanted properties. 
  • All the master leases have single users and are on long lease terms of between 7 and 15 years, with the first expiry in 2020. The exception is the Solaris master lease with underlying sub-lessees, which expires in 2018. 
  • Lastly, the Manager mitigates the risk of arrears by collecting 12 to 18 months rental deposits for master leases, and 3 to 5 rental deposits for multi-tenanted buildings. 

Maintain "Accumulate" rating with lower DDM valuation of S$0.83 

  • The portfolio is generally stable, with no master leases expiring within the next two years. However, we see weakness in y-o-y DPU growth going forward, owing to the lower occupancy and larger unit base. 
  • We have lowered our FY16/17/18 gross revenue assumptions by 2.3%/1.9%/0.7%. 
  • DDM valuation is now S$0.83 (previously S$0.86). 

Relative valuation 

  • Soilbuild Business Space REIT (SBREIT) is relatively undervalued compared to the peer average P/NAV multiple, and offers a higher yield compared to the larger-capitalised peers. 
  • SBREIT is also currently trading just below -1 standard deviations below its historical average P/NAV multiple. 

Richard Leow CFTe Phillip Securities | 2016-04-18
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.83 Down 0.86