Soilbuild Business Space REIT - DBS Research 2020-04-17: New Leases To Provide A New Lease Of Life

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SOILBUILD BUSINESS SPACE REIT (SGX:SV3U)

Soilbuild Business Space REIT - New Leases To Provide A New Lease Of Life

• Soilbuild REIT achieved 3.9% higher rents for new leases signed in the quarter.
• Negative rental reversion of 14.6% recorded for lease renewals, largely from Beng Kuang Marine’s lease that was renewed for three years.
• Portfolio occupancy rose marginally q-o-q from 84.0% to 84.7%.
• Soilbuild REIT's 1Q20 DPU of 0.88 Scts was 4.5% lower q-o-q; capital distributions for 1Q20 was withheld.

COVID-19 more of a disruption to ancillary services

• COVID-19 has caused a disruption to Soilbuild Business Space REIT (SGX:SV3U)’s operations but core earnings remain relatively intact.
  • Similar to other industrial REITs, the retail/ancillary component has been hit worse than industrial tenants.
  • Singapore – F&B tenants contribute 0.7% to revenues, Ancillary services contribute 1.7% to revenues.
  • Australia – Retail tenants contribute 0.5% to revenues.
• With the ongoing Circuit Breaker measures in Singapore, many industrial tenants continue to operate as they are part of essential services.
  • Tenants at Business Parks may be more affected as they are unlikely to qualify as essential services; we estimate that only 40% of tenants continue to operate as usual.
  • More than 50% of tenants at Industrial factories continue to operate.
• The Temporary Measures Act (Act) in Singapore and Code of Conduct (Code) in Australia were both implemented on 7 April 2020.
  • Both the Act and Code are very similar in nature; tenants who have been significantly affected by COVID-19 can seek up to six months of rental deferment without the risk of being evicted.
  • The principles of both measures are to assist tenants to cope with the current COVID-19 disruptions in the near-term, but it does not waive their obligations.
  • We understand that the intention to seek for rent deferments have come mostly from the retail and F&B tenants; only a handful of industrial tenants have asked for rent deferments.
• Soilbuild REIT will pass on the entire 30% property tax rebate (for office and industrial tenants) to tenants.

Gross revenue rose 2.9% q-o-q, and 3.6% y-o-y

• Increase in revenue q-o-q was mainly due to full quarter contribution from 25 Grenfell Street. However, DPU fell 4.5% q-o-q mainly due to allowance for doubtful receivables and lack of capital distributions.
• Soilbuild REIT chose to defer capital distributions of S$0.8m relating to a minimum rental guarantee and incentives. If capital distribution had not been deferred, DPU would have been 0.95 Scts instead of 0.88 Scts.
• An estimated A$10.7m of additional capital distributions in the form of rental incentives and guarantees will be available going forward.
• The lower DPU still translates to a very attractive annualised yield of more than 9.5% based on the current unit price.

Portfolio occupancy rose marginally by 0.7% to 84.7% q-o-q

• Excluding 2 Pioneer Sector 1 which will be redeveloped, portfolio occupancy would have been 90.0%.
• Higher occupancy in 1Q20 was attributed to improved occupancies at West Park BizCentral and 25 Grenfell Street.
• Negative rental reversion of 14.6% was recorded for renewals of more than 197,000 sqft of space.
  • Largely due to the renewal of Beng Kuang Marine (SGX:BEZ)’s lease that posted c.25% negative rent reversion.
  • Beng Kuang Marine’s lease is pegged to the occupancy of a dormitory component that is currently in the 75%-80% range; potential upside if occupancy of dormitory improves.
• New leases amounting to 9,900 sqft recorded an increase of 3.9% in rental rates.
• Only 14.9% of leases (by gross rental income) due for expiry in FY20.
  • Majority of expiries from Solaris and West Park BizCentral in 2H20.
  • Expect positive rental reversions at Solaris, and possibly flat or weaker reversions at West Park BizCentral.
• Valuation of investment properties declined by 1.1% due to weaker AUD exchange rate.
• Redevelopment of 2 Pioneer Sector 1 to proceed; plot ratio to increase from 0.55x to either 1.0x or 1.32x.
• Completed the divestment of 72 Loyang Way for S$33.08m; proceeds will be used to pare down debt.

Leverage ratio to improve to 36.3%

• Gearing increased marginally from 38.2% to 38.5% q-o-q.
  • To drop to c.36.3% when divestment proceeds are used to pare down debt.
• No refinancing risks as there is no debt expiring in FY20.
  • Earliest refinancing will be in 1Q21 (S$58.5m).
  • Available committed lines of credit estimated to be c.S$54m after paring down of debt.
• The MAS just announced an increase in leverage limits for REITs from 45% to 50%, and this should remove the gearing overhang for Soilbuild REIT.

Our thoughts

• Despite lowering our Target Price from S$0.55 to S$0.50 to account for disruption to earnings caused by the COVID-19 pandemic, we are optimistic on Soilbuild REIT’s earnings outlook. The full year contribution from 25 Grenfell Street and redevelopment of 2 Pioneer Sector 1 should offer upside to earnings in the mid-term.
• Soilbuild REIT’s prudent approach to account for doubtful receivables and availability of capital distribution reserves should help to support earnings and distributions going forward.
• We upgrade our call to BUY on 35% upside potential to our Target Price and current dividend yield of 9.5%.
• Moreover, the higher allowable leverage limit of 50% should immediately remove any overhang on Soilbuild REIT’s relatively high gearing of 38.5%.
• See Soilbuild REIT Share Price; Soilbuild REIT Target Price; Soilbuild REIT Analyst Reports; Soilbuild REIT Dividend History; Soilbuild REIT Announcements; Soilbuild REIT Latest News.

Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-04-17

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