Soilbuild Business Space REIT - DBS Research 2019-01-23: Attractive Yield Play

SOILBUILD BUSINESS SPACE REIT (SGX:SV3U)

Soilbuild Business Space REIT - Attractive Yield Play

Soilbuild REIT's FY18 DPU of 5.29 Scts in line.
Australia and Solaris to remain brightest spots for Soilbuild REIT in 2019 while the industrial sector bottoms out.
Concerns over NK Ingredients, but upside could come from redevelopment potential.
Maintain BUY; S$0.65 Target Price.

As industrial rents continue to bottom out, we believe the timely expansion into Australia and positive contributions from crown jewel Solaris will help infuse stability. This may help revive investor interest in SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) as DPU outlook reverts to positive trajectory in FY20F, after a three-year hiatus.
Despite having gained c.6% since our upgrade in October, FY19F-20F yields of 8.6-8.9% (+1SD of historical range) remain attractive. Maintain BUY.

While underlying results in 4Q18 remained weak, we believe that they have been largely priced in by the market, as Soilbuild REIT's yields are among the highest vs peers. DPUs have also been under pressure over the last few years but contributions from Soilbuild REIT's newly acquired Australian assets – which offer earnings visibility, could help steady the ship.
Coupled with positive reversions for Solaris which provide an earnings buffer, they should augment the resilience and even growth of DPUs hereon.

After its maiden acquisition in Australia, we believe that the Manager may still be on the lookout for more acquisition opportunities ahead. While Australia remains a new market for the group, strong demographics and still-attractive yields help mitigate downside risk and promote growth.

Maintain BUY; DCF-based Target Price of S$0.65. This implies target yields of 8.6-8.9% for FY19F-20F, which is attractive.

Potential asset revaluations. Gearing could head up to c.40% on asset devaluations. Acquisitions could mean equity fund raisings which could be dilutive.

Led mainly by maiden contributions from its Australian acquisitions and higher contributions from Solaris, Soilbuild REIT's gross revenue and net property income rose by 24.3% and 15.3% y-o-y to S$25.8m and S$20.5m respectively in 4Q18. The receipt of one-off liquidation proceeds amounting to S$3.25m from Technics Offshore Engineering also played a role, and helped offset lower contributions from West Park BizCentral, Eightrium, Tuas Connection and KTL Offshore post its divestment in February 2018.
NPI margins continued to contract on a sequential basis, from 81.9% (3Q18) to 79.4% (4Q18), mainly on higher property expenses for Solaris (post conversion to a multi-tenanted building in August 2018) and higher property taxes incurred for West Park BizCentral.
As a result, income available for distribution to investors increased by 5.7% y-o-y to S$15.4m but fell c.6.7% y-o-y to S$55.9m on a full-year basis. 4Q18 DPU jumped nearly 5% y-o-y to 1.451 Scts. Excluding Technics Offshore proceeds, we estimate that DPU would have been closer to 1.16 Scts.
Overall, Soilbuild REIT's FY18 DPU of 5.29 Scts (-7.9% y-o-y) was largely in line.

Helped by the inclusion of its Australian assets, portfolio occupancy improved by 2.3% q-o-q to 89.5%. On a standalone basis, Soilbuild REIT's Singapore portfolio also fared slightly better on the occupancy front, +1.4% to 88.6% (4Q18) from 87.2% (3Q18).
Soilbuild REIT signed over 885,390 sqft of leases over FY18, of which over 175,000 sqft (c.20%) were signed in 4Q18. After showing some positive signs in 3Q18, rental reversions turned negative once again during the quarter, mainly due to the lower proportion of renewals at Solaris (which continues to enjoy positive reversions) in 4Q.
Reversions on leases, while negative at -12.6%, was still much improved vs -16.4% in 2Q18. On a blended basis for FY18, the decline in gross rents also moderated to 8.6% from 9.2% in FY17.
Risk of tenant defaults such as NK Ingredients on concerns over recent rent delays. Downside is mitigated by security deposit, while upside could come from potential redevelopments, which are not factored into our estimates.
As industrial rents ride out their bottoming trend in 2019, we believe that positive contributions from Solaris and earnings visibility (and growth) from Australia assets will help anchor resilience and yields.

Recent updates by the Manager reveal that NK Ingredients has fallen behind on its rental obligations for over two months now. However, downside risk over the near term is mitigated by c.6 months' worth of security deposits currently withheld by Soilbuild REIT.
While efforts to negotiate a top-up in security deposits for the asset are ongoing, the progressive drawdown on existing deposits may prompt Soilbuild REIT to re-evaluate redevelopment opportunities for 2 Pioneer Sector, which has unutilised GFA given its approved plot ratio of 1.0, into a higher-spec facility, which will boost NAV.

Soilbuild REIT's gearing climbed from c.37.6% (2Q18) to c.39.1% (4Q18) post acquisition, which falls at the higher end of management’s range of 30-40%. This includes deferred payment of S$19.3m due to the Sponsor for Solaris. This means that any acquisitions will likely be funded through a mix of equity and debt.
We would also look out for potential asset revaluations as persistent negative rental reversionary trends for industrial assets may result in lower asset valuations and potential downside to current NAV of S$0.63.

Higher proportion of interest costs hedged into fixed rates from 66% (3Q18) to 74% (4Q18), resulted in a 10-bp increase in all-in debt costs to 3.52% as at 31 December 2018. Average debt maturity remained stable at 3.2 years.

Carmen Tay DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-01-23

SGX Stock Analyst Report BUY MAINTAIN BUY 0.650 SAME 0.650