SB REIT – DBSV

Grinding out stable income

  • 2Q14 results beat IPO prospectus forecasts, in line with our estimate
  • Slight dip in occupancies; 85% of NLA expiring in FY14 have been renewed
  • Low gearing implies headroom for acquisition
  • BUY, TPS$0.89

Highlights

2Q14 results beat forecasts. Gross revenues and net property income grew 0.9% and 3.4% to S$16.7m and S$14.0m, respectively. The stronger performance was driven by (i) additional rental income from Tellus Marine which was acquired in May, (ii) rental escalation at master-leased properties (Solaris / Beng Kuang Marine ) and higher rents at Eightrium@ Changi Business Trust, West Park Biz Central. These offset weaker occupancy at Tuas Connection. Interest costs were 3.7%higher than forecasts because the REIT drew down an additional S$15m debt for the Tellus Marine acquisition. But as the loan is on floating rate, average cost of debt edged down to 3.08%. Distributable income beat our estimate by 6.1%, at S$12.6m (DPU 1.50 Scts), and was 1.3% above prospectus forecast.

Our View

Dip in occupancies; minimal lease expiry in 2014. The nonrenewal of a lease at Tuas Connection reduced occupancy to 93.2% by end 30 Jun’14 vs 100% upon IPO. But the manager is actively seeking new tenants to take up the vacated space quickly. The weaker occupancy was partially offset by improved take-up at Eightrium @ CBP and West Park Biz Central. Looking ahead, SBREIT has renewed, forward leased and pre-committed 85% of leases expiring in 2014, implying strong earnings visibility going forward. Rental reversions for renewals and new leases for its factory space in were strong in 2Q14 at 22%-32% because of low expiring rents.

Focus on renewals in FY15F. With most of its leasable area taken up in FY14, we would focus on the forward renewal of c29% of NLA in FY15, the bulk of which is in West Park BizCentral and Tuas Connection. We take comfort that expiring rents are >15% below current transacted market rents, suggesting renewals should remain stable.

Recommendation

BUY, TP S$0.89. We like SBREIT’s higher-than-average industrial REIT yields of 7.5%-8.1%, which are relatively secured. Gearing is at c.30% currently, implying sufficient headroom to fund selected (future) acquisitions.

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