Soilbuild REIT - OCBC Investment 2018-09-21: Positive On The Aussie Diversification


Soilbuild REIT - Positive On The Aussie Diversification

  • 6% down in < 2 weeks.
  • Accumulate ahead of the curve.
  • Fair Value remains at S$0.69.

Down 5.9% in less than 2 weeks

  • Soilbuild Business Space REIT (Soilbuild REIT) share price has dropped 5.9% since its 7 Sep announcement on the proposed acquisition of two Australian assets. The assets are two 100%-occupied Australian properties: a centrally located office in Canberra (“14 Mort Street”) for S$55.0m and a poultry processing plant in Adelaide (“Inghams Burton”) for S$61.3m.
  • The acquisitions are expected to be completed in 3Q18. Funding is likely to be a combination of
    1. Australian dollar loans and through
    2. the issuance of S$60m or S$100m perpetual securities.
  • Based on FY17 financials, DPU accretion from the acquisitions would be 1.19% (in the case of S$60m perps) or 0.14% (in the case of S$100m perps), on a pro forma basis. We believe that the recent decline in Soilbuild REIT’s unit price may have to do with concerns over the cost of perpetuals needed to fund the acquisition.

~ ~ Where SG investors share

Positive on the proposed Aussie acquisitions

  • While we note the expected DPU accretion is minimal, we see this proposed acquisition as a right step for Soilbuild REIT’s portfolio as it
    1. increases the operational stability of the portfolio with its geographical diversification, longer WALE and in-built rental escalation and
    2. the acquisitions increase the average land lease to expiry of the portfolio.
  • Notably, 14 Mort Street has a 3.75% annual rental escalation while Inghams Burton’s rental escalation is pegged to the % change in Australian CPI. 
  • Post acquisition, the Australia properties are expected to make up 9.5% of Soilbuild REIT’s portfolio valuation.

Trading at 8.5% FY18F yield as of 20 Sep

  • We expect the industrial space in Singapore to remain challenging for most of 2018, but take comfort in that only 9.6% of gross rental income is due for renewal (including underlying tenants at Solaris) for the rest of the year. We look forward to the industrial sector bottoming end-2018/early-2019 and believe that Soilbuild REIT is ready to participate on the upturn.
  • As at 20 Sep’s close, we see an opportunity to collect units in the REIT 2-3 quarters before stronger signs of operational improvement are seen. Soilbuild REIT is trading at 8.5% FY18F dividend yield and we continue to find the REIT attractively priced as at 20 Sep’s close.
  • We re-iterate BUY on Soilbuild REIT with a fair value of S$0.69.

Deborah Ong OCBC Investment Research | 2018-09-21
SGX Stock Analyst Report BUY Maintain BUY 0.690 Same 0.690