SB REIT – OCBC

A good showing

  • FY14 DPU above prospectus forecast
  • 100% occupancy rate
  • FY15F distribution yield of 8.2%

4Q14 results within our expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported its 4Q14 which met our expectations. Revenue rose 8.3% YoY to S$17.7m, underpinned by contribution from new acquisitions and higher rental revenue from Solaris, West Park BizCentral and Tuas Connection. DPU grew 5.0% to 1.585 S cents (ex-dividend on 27 Jan). For FY14, Soilbuild REIT’s revenue came in at S$68.1m, forming 100.6% of our estimate but was 2.8% higher than its projection stated in its IPO Prospectus. DPU of 6.193 S cents translated into a distribution yield of 7.8%, and was 0.7% and 3.8% higher than ours and the REIT Manager’s forecasts, respectively.

Healthy operational statistics

Soilbuild REIT’s portfolio occupancy stood at 100%, as at 31 Dec 2014. It achieved an average rental reversion of 9.8% in FY14. 18.2% of Soilbuild REIT’s leases (by rental income) are expiring in FY15, and management will increase its focus on securing renewals on these leases. Negotiations for renewals of over 20% of FY15 expiries (~200,000 sq ft) have already been completed. Approximately 81.9% of Soilbuild REIT’s total debt has been hedged with interest rate swaps.

Maintain BUY

While there is an impending court case regarding a dispute over the amount of land rent payable to JTC Corporation for its Solaris property, Soilbuild REIT believes it has a strong case based on the advice of its legal counsels. Moreover, the property is leased under a triple net lease. Hence all the land rent has to be borne by the lessee. This means that there would be no impact on the distributable income of Soilbuild REIT up to 15 Aug 2018 even if it loses the court case. Taking into account the recent completion of acquisitions made by Soilbuild REIT, we raise our FY15 and FY16 DPU forecasts by 3.6% and 3.9%, respectively. Rolling forward our valuations, we derive a higher fair value estimate of S$0.93 (previously S$0.88). Coupled with an attractive FY15F distribution yield of 8.2%, we maintain our BUY rating on Soilbuild REIT.