Soilbuild REIT - OCBC Investment 2019-01-23: Challenges Still Ahead


Soilbuild REIT - Challenges Still Ahead

  • One-off liquidation proceeds.
  • Competitive pressures at West Park BizCentral.
  • Fair Value drops to S$0.62.

4Q results boosted by one-off liquidation proceeds of S$3.25m

  • SOILBUILD BUSINESS SPACE REIT (SGX:SV3U)’s 4Q18 results were above expectations due to a one-off item. 4Q18 DPU increased 16.5% q-o-q and 4.9% y-o-y to 1.451 S cents mainly due to S$3.25m in liquidation proceeds received from Technics Offshore Engineering.
  • On a full-year basis, SoilBuild REIT's FY18 DPU fell 7.5% y-o-y to 5.284 S cents or 104.5% of our initial full-year forecast.
  • Without the one-off, 4Q18 DPU would have fallen 8.1% q-o-q and 17.3% y-o-y to 1.144 S cents, while FY18 DPU would have fallen 12.9% y-o-y to 4.98 S cents or 98.5% of our initial full-year forecast. The 8.1% q-o-q decline in DPU took us by surprise.
  • On a q-o-q basis, 4Q18’s NPI was S$1.5m higher, but was offset by greater expenses including a S$0.5m increase in finance costs, a S$0.5m increase in other trust expenses, a full quarter distribution to perpetual securities holders (S$0.9m higher q-o-q), and a S$0.4m aggregate increase in other expense items.

Pressures to continue at West Park BizCentral

  • SoilBuild REIT's rental reversions came in at -12.6% for new and renewal leases in 4Q18 and -8.6% for those in FY18. In particular, West Park BizCentral is expected to continue to face negative rental reversions in the coming year due to competition from strata-titled properties around the Tanjong Kling area.
  • In addition, as some of the tenants within West Park BizCentral use the space for logistics and freight forwarding, West Park BizCentral faces additional competition in the form of warehousing alternatives elsewhere in Singapore, some of which are now trading below a dollar per sq ft per month.

Bright spot to be found in Solaris

  • We estimate that NPI from Solaris was S$1.4m higher y-o-y in 4Q18, after its conversion from being a master-leased to a multi-tenanted asset, and we see this is as a positive going forward.
  • As for Tuas Connection, management believes that rents are slowly stabilizing, with the magnitude of negative rental reversions expected to moderate in 2019.
  • We revisit our thesis of a positive operational outlook for SoilBuild REIT in 2019 and after adjustments, our fair value falls from S$0.665 to S$0.620. As at 22 Jan’s close, SoilBuild REIT is trading at 8.1% FY19F dividend yield.
  • Given the lower fair value, we downgrade SoilBuild REIT from Buy to HOLD.

Deborah Ong OCBC Investment Research | 2019-01-23
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.62 DOWN 0.665