SOILBUILD BUSINESS SPACE REIT
SV3U.SI
Soilbuild Business Space Reit (SBREIT SP) - 1Q18 DPU Down 11.1%; Divestment Proceeds To Help Pare Down Debt
- Soilbuild Business Space REIT (SBREIT)'s 1Q18 DPU of 1.32 Scts (-11.1% y-o-y) slightly above expectations on temporary cost effects.
- Estimated FY18F income loss of c.S$2m post KTL Offshore divestment, but longer-term cost savings to arise as proceeds are used to pare down debt.
- Occupancy to remain challenged in upcoming 2Q18, but selected assets could fare better in the second half.
- Maintain HOLD and Target Price of S$0.62.
What’s New
Gross revenues decline but NPI margins hold steady.
- Gross revenues for 1Q18 stood at S$19.4m, representing a y-o-y decline of S$2.5m (or 11.5%). The decrease was largely attributed to lower contributions from 72 Loyang Way, West Park BizCentral, Eightrium and KTL Offshore, which registered revenue declines of S$1.6m, S$0.4m, S$0.4m, and S$0.2m respectively, but partly offset by slightly higher revenue from Solaris (+S$0.1m y-o-y).
- NPI declined to S$17m as a result (vs S$19.2m a year ago), but NPI margins held steady at 87.4%.
- We estimate revenue impact from the divestment of KTL Offshore to be c.S$2m for FY18F.
KTL proceeds to help pare down debt, leading to longer-term interest cost savings.
- The divestment of KTL Offshore was completed on 28 February 2018 for a total consideration of S$55m. With S$100m worth of SBREIT 3.45% 05/2018 set to mature on 21 May 2018, the REIT expects to channel KTL divestment proceeds towards paring down debt (as opposed to refinancing).
- Amidst the current rising rate environment, we view this move as positive as it could help generate sustainable, longer-term cost savings for SBREIT and help defend margins ahead of a pick-up in occupancy.
DPU impact partly mitigated by divestment gain.
- Divestment gain of c.S$1.7m for KTL Offshore helped mitigate the
- impact of a c.11.6% NPI decline on distributable income, and
- dilutive effect on DPU arising from unit-based management fee payments.
- For 1Q18, distributable income of S$14m was 10.4% lower vs 1Q17. Meanwhile, 1Q18 DPU of 1.324 Scts as compared to 1.489 Scts in 1Q17, was down c.11.1% and formed 27% of our full-year forecasts, exceeding our expectations slightly.
Occupancy fell lower to 87.5%, outlook remains challenged.
- Portfolio occupancy fell sequentially from 92.7% in 4Q17 to 87.5% in 1Q18, mainly due to nonrenewals at Eightrium and West Park BizCentral, and continued weakness at Loyang Way.
- Occupancy at West Park, which represented c.23% of portfolio income, dropped from 90.4% (4Q17) to 81.5% (1Q18). Retention was relatively weak in 1Q at c.50% as the site was impacted by rightsizing measures and business discontinuations among several logistics-related tenants, but should improve in the upcoming quarter as SBREIT is in the midst of filling up some of these vacancies.
- Similarly, occupancy at Eightrium (c.10% of portfolio income) dropped to 84.9% vs 97.7% in the previous quarter, but could fare better in 2H18 post the completion of AEI.
- Following the repossession of Senoko Way from master tenant, Tellus Marine, occupancy has fallen to 34.2%. While security deposits should continue to provide income support over the next 10-12 months, medium-term risk remains if the manager is unable to backfill the property.
Rental reversions.
- Given that leasing spreads are still negative, we saw an overall 7.8% drop in renewals.
Carmen Tay
DBS Vickers
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Derek TAN
DBS Vickers
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http://www.dbsvickers.com/
2018-04-18
SGX Stock
Analyst Report
0.620
Same
0.620
