Soilbuild Business Space Reit (SBREIT SP) - DBS Research 2018-04-18: 1Q18 DPU Down 11.1%; Divestment Proceeds To Help Pare Down Debt

Soilbuild Business Space Reit (SBREIT SP) - DBS Vickers 2018-04-18: 1Q18 DPU Down 11.1%; Divestment Proceeds To Help Pare Down Debt 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
    1. impact of a c.11.6% NPI decline on distributable income, and
    2. 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 | Derek TAN DBS Vickers | 2018-04-18
SGX Stock Analyst Report HOLD Maintain HOLD 0.620 Same 0.620