Soilbuild Business Space REIT - Phillip Securities 2016-07-14: Negligible vacancy risk for the rest of the year

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SOILBUILD BUSINESS SPACE REIT SV3U.SI 

Soilbuild Business Space REIT - Negligible vacancy risk for the rest of the year

• S$19.57mn 2QFY16 GRI missed consensus expectations of S$20.6mn by 5%.
• 1.565 cents 2QFY16 DPU in line with consensus expectations of 1.54 cents.
• Lower than expected GRI was offset by lower property tax, lifting NPI.
• 2% of leased lettable area left to renew this year.

Lower than expected GRI was offset by lower property tax, thus lifting NPI and resulting in DPU coming within expectations

• Gross rental income (GRI) missed our expectations by 5%, while distribution per unit (DPU) was in line. This was due mainly to lower property tax for West Park BizCentral, which lifted net property income (NPI) and flowed through to distributable income. 
• The 3.1% lower yoy DPU was due to the larger unit base following the Private Placement of 111.8mn new units in 4QFY15.

Sluggish leasing in 2QFY16, but portfolio occupancy remains healthy at 92%

• Three renewals were done at 5.7% negative rental reversions; and three new leases were signed at West Park BizCentral and Tuas Connection. There were no forward renewals done during the quarter. Occupancy at West Park BizCentral was worse than expected, plunging 9.6pps qoq to 82.7%. 
• The Manager shared that rent incentives (rent-free period and fit-out period) have remained consistent, but it is the signing rate that has come down. The Manager also guided that volatility in occupancy is to be expected, due to the softer market. Some short-term new leases (three to six months) were signed, which will help to cushion the volatility.

Update on Technics Offshore Property

• The Manager has encashed the security deposit of S$11.8mn from Technics and continues to bill the tenant with rent in arrears. The Manager is actively seeking new tenants to take over the property before the rental arrears exceeds the security deposit. 
• Our view is that it would likely be challenging to find a single tenant to take up the entire Property. 
• The Manager shared that "a couple of smaller users" have expressed interest in the Property, with one putting in an offer. The Manager is open to leasing out the space under a multi- tenancy, and is optimistic on achieving 75% to 80% occupancy.

Maintain "Accumulate" rating with lower DDM valuation of S$0.79

• The portfolio is generally stable, with no master leases expiring within the next two years and only 2% of leases expiring for the remainder of 2016. 
• We have lowered our FY16/17/18 gross revenue assumptions by 2.4%/2.9%/3.6% from previous estimates, in view of the softer leasing market. 
• DDM valuation is now S$0.79 (previously S$0.83).

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-07-14

Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.79 Down 0.83