Soilbuild Business Space REIT - DBS Research 2018-09-07: Leapfrogging Into Australia

Soilbuild Business Space REIT - DBS Group Research 2018-09-07: Leapfrogging Into Australia SOILBUILD BUSINESS SPACE REIT SGX:SV3U

Soilbuild Business Space REIT - Leapfrogging Into Australia

  • Proposed acquisition of two Australian properties – an office building and industrial facility for A$116.25m.
  • Initial NPI yield of 6.14% (post-cost basis) with rental escalations in place.
  • Funding through combination of AUD debt and perpetuals; pro-forma FY17 DPU could increase by 0.1% to 1.2%, depending on funding mix.
  • Estimates maintained pending completion of the deal.

What’s New

First foray into Australia’s office and industrial markets.

~ SGinvestors.io ~ Where SG investors share
  • Soilbulild REIT (SBREIT) is proposing to acquire two Australian properties (lettable area of 30,807.5 sqm) – an Office Building in Canberra CBD and Poultry Processing Plant in Adelaide, which marks the group’s first overseas venture.
  • The purchase consideration of A$116.25m is based on the aggregate valuation of A$116.5m by Colliers, which does not take into account outstanding incentives. Including acquisition and other transaction-related expenses, total acquisition cost would be c.A$120.96m.
  • Initial NPI yield for the proposed acquisition stands at 6.42%, or 6.14% on a post-transaction cost basis.

Strong property fundamentals.

  • Both properties are fully occupied and are backed by long land tenures and WALE of 13.2 years:
    1. Office Building at 14 Mort Street (Canberra CBD) An 8-storey commercial office building with c.9,383.5 sqm of lettable area. While the asset sits on a leasehold site, over 60 years remains on its land lease. Underlying WALE stands at 6.5 years, with initial NPI yield of 6.31% (5.9% post-transaction cost) and rental escalation of 3.75% p.a.
    2. Poultry Processing Plant spanning 1118,1120,112-1136 & 1138-1146 Port Wakefield Road (Burton, Adelaide) A poultry production and processing facility located 20km north of Adelaide CBD with c.21,424.3 sqm of lettable area. The freehold asset is currently leased to ASX-listed Inghams Group – a leading producer in Australia and New Zealand with market cap of c.A$1.4bn. The property is backed by long underlying WALE of 16.1 years, with initial NPI yield of 6.51% (6.42% post-transaction cost). Rental escalations are pegged to Australia’s CPI.

Expansion into Australia a welcome move.

  • Ahead of a sustained recovery in underlying rents for its Singapore-centric portfolio, SBREIT’s geographical diversification into Australia promotes growth. ~ SGinvestors.io ~ Where SG investors share
  • While Australia remains a new market for the group, strong demographics and property fundamentals mitigates downside risk. The target assets offer a long WALE of 13.2 years, which is expected to boost portfolio WALE from 3.1 to 3.9 years.
  • Portfolio occupancy should also improve from 87.6% to 88.6%.

Pro-forma DPU could increase by 0.1% to 1.2%, depending on funding mix.

  • The Manager intends to finance the deal via a combination of AUD loans and perpetuals.
  • As at 30 June 2018, SBREIT’s aggregate leverage stood at 37.6%. Assuming funding from S$60m/S$100m of perpetual securities – and remainder from AUD loans, SBREIT’s FY17 pro forma DPU could increase by 1.19%/0.14%, respectively. ~ SGinvestors.io ~ Where SG investors share
  • Given SBREIT’s long-term aggregate leverage range of 35% to 40%, we believe that the Manager is likely to lean towards the issuance of S$100m worth of perps instead – striking a balance between DPU growth and optimisation of gearing levels, leaving further debt headroom for future acquisitions.

Carmen Tay DBSV Group Research | Derek TAN DBSV Research | https://www.dbsvickers.com/ 2018-09-07
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