Soilbuild Business Space Reit - DBS Research 2018-01-19: Portfolio Reconstitution In Progress

Soilbuild Business Space Reit - DBS Vickers 2018-01-19: Portfolio Reconstitution In Progress SOILBUILD BUSINESS SPACE REIT SV3U.SI

Soilbuild Business Space Reit - Portfolio Reconstitution In Progress

  • Weak 4Q17 results but in line with expectations.
  • NAV dipped on the back of lower fair values for major properties across portfolio.
  • Downside to DPUs will bottom in FY18F.
  • HOLD call and S$0.62 Target Price maintained.



Maintain HOLD, Target Price S$0.62. 

  • We maintain our HOLD call on Soilbuild Business Space Reit (SBREIT) with Target Price of S$0.62, implying 6% total return. 
  • We believe that ongoing uncertainties lingering over the possible vacancy risk arising from tenant defaults over various assets and the lack of imminent catalysts will cap share price performance.


WHAT’S NEW


Operations still under pressure 

  • Soilbuild Business Space REIT 4Q17/FY17 Results: DPU down 0.5%; divestment of KTL Offshore 

NPI margin erosion despite full-year top-line growth: 

  • Gross revenue for 4Q17 fell 4.3% to S$20.7m, largely attributed to lower contribution from 72 Loyang Way amounting to S$1.7m, which was partially offset by higher revenue from properties such as NK Ingredients property and Solaris. 
  • Net property income (NPI) was 6.0% lower y-o-y at S$17.8m. 
  • Full-year FY17 gross revenue was S$84.4m, 4.5% higher y-o-y thanks mainly to the increase from Bukit Batok Connection (+S$6.0m) that was acquired in Sep 2016, and partially offset by reduction from 72 Loyang Way (- S$4.0m). 
  • NPI was 4.0% higher at S$73.5m. Full year NPI margin eroded to 86.7% from 87.2% y-o-y.

DPU declined y-o-y: 

  • Distributable income for FY17 was S$60.0m, 0.5% lower than FY16 largely due to the absence of property and lease management fees payable in units as opposed to cash. 
  • In the longer term however, we believe this decision should mitigate the dilutive effect on DPUs hence improve DPU growth. FY17 DPU was 5.712 Scts compared to 6.091 Scts in FY16, down 6.2%, and represents 105% of our forecast, slightly exceeded our expectations.

NAV declined to S$0.64 Scts. 

  • This was due to revaluation of the REIT’s portfolio downwards by close to S$80.5m. This was largely from the drop in fair value for 72 Loyang Way (S$27m), West Park BizCentral (S$20m), Eightrium (S$13.2m), NK Ingredients (S$80m), Tuas Connection (S$4.3m), KTL Offshore (S$3.0m) and Bukit Batok Connection (S$2.6m).

Occupancy improved from a year ago, though 72 Loyang Way remains a key challenge. 

  • Portfolio occupancy improved from a low of 89.6% at the end of FY16 to 92.7% thanks to Tuas Connection. However, q-o-q occupancy dipped from 94.1% as at end-Sep 2017 as Eightrium posted a drop to 97.7% which we believe is frictional. 
  • As for 72 Loyang Way, since the default of its master tenant, Technics, and the full utilisation of its security deposit in May 2017, the Manager has sought regulatory waiver to lift the restriction placed on the sector that any future tenant is operating in; this represents 30% of the space which is filled to 27%. The challenge remains sourcing for an anchor tenant as 70% of the property is still required to be leased out to one anchor tenant from the marine & offshore industry.

Reversion still negative. 

  • In FY17, SBREIT renewed and newly leased 924,966 sqft of area with an overall reversion rate of -9.2%. 4Q17 was worse at -15.7%.

Proposed divestment of KTL Offshore building (“KTL Offshore”). 

  • KTL Offshore is the latest property to head into default with unpaid rentals being drawn from SBREIT’s cash balance which would last only till May 2018. In 4Q17, the Management announced the proposed divestment of the troubled property at a sale price of S$55.0m, 3.8% higher than its book value. 
  • These divestment, in our view will enable SBREIT to exit from an asset with weak cashflows and proceeds can be deployed to higher yielding sources. An extraordinary general meeting (EGM) will be convened in 1Q18 to seek unitholders approval for this divestment to the Sponsor. Our numbers are not updated yet to account for this divestment.



Update of investment mandate. 

  • The manager of SBREIT has announced the extension of investment mandate in Australia. The key rationale is to increase SBREIT’s pool of investment targets and provide access to assets with longer land lease tenure, potentially freehold ones. The REIT however will still comprise of largely Singapore-based assets in the foreseeable future.
  • In our view, Australia is an attractive market and will present many acquisition opportunities for the REIT. However, we note that it has a competitive landscape, resulting in a compression of yields. 
  • We understand that the REIT is looking for properties in the suburban business space where yields have yet to compress significantly.   


Where we differ: More conservative forecasts. 

  • 4Q17 results remained weak with DPUs and NAV under pressure. 
  • We do not see a recovery in the immediate term, mainly on the back of difficulty in backfilling the space at 72 Loyang Way (c.8% of top line) and the possible vacancy from defaulting tenants (c.11% of top line) and lower income due to further tenant defaults at NK Ingredients and KTL offshore buildings, the latter which is proposed to be divested by 1Q18 .


Potential catalyst: Portfolio reconstitution. 

  • The Manager has proposed the sale of the KTL offshore property for S$55m to the Sponsor, funds of which can be utilised to repay debt. In terms of inorganic growth, the Manager announced an intention to look at Australia to expand its investment scope.
  • Australia, in our view, presents many acquisition opportunities but given SBREIT’s lack of scale and operational experience, it could prove to be tough to scale up meaningfully.


Valuation

  • We have maintained our DCF-based Target Price of S$0.62.


Key Risks to Our View

  • Potential fund raising on the back of acquisitions Gearing head up to c.40% given asset devaluations. 
  • Acquisitions could mean equity fund raisings which could be dilutive.






Derek TAN DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-01-19
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.620 Same 0.620



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