Category: SB REIT
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.
SB REIT – OCBC
Acquires light industrial building
- 10-year lease tenure
- Initial NPI yield likely at 7.5%
- Gearing to inch up slightly to 32.0%
Sale-and-leaseback agreement
Soilbuild Business Space REIT (Soilbuild REIT) proposed to acquire a light industrial building located at 20 Kian Teck Lane in Singapore last week. The total cost of the transaction was estimated at S$24.4m, including the purchase consideration of S$22.4m, upfront land premium of S$1.7m and other expenses. We understand the vendor is Speedy-Tech Electronics Ltd, an indirect wholly-owned subsidiary of Integrated Micro-Electronics listed on the Philippine stock exchange. Upon completion of the transaction, Soilbuild REIT will lease the property back to Speedy-Tech, which will undertake to commit 100% occupancy of the building on a 10-year triple-net lease.
More details on acquisition
We view the acquisition positively as the long leaseback term will add certainty to Soilbuild REIT’s income stream and provide further diversification to its portfolio assets. Based on our projections, the property is likely to generate an initial NPI yield of 7.5% with an annual rental escalation of 2.5%. This, we note, is higher than its portfolio yield of c. 6.0%, thus likely making the deal DPU-accretive. Management guided that it intends to fund the acquisition fully by drawing down part of the S$100m term loan facility that was signed in May 2014. Accordingly, Soilbuild REIT’s aggregate leverage is expected to increase from 30.3% as at 30 Jun to 32.0%.
Maintain BUY
Given that the acquisition is expected to complete in 4Q this year, we now incorporate its financial impact into our forecasts. In 2H14, we believe Soilbuild REIT’s portfolio performance will remain robust, supported by healthy organic growth and new contributions from its recently announced acquisitions. We continue to like Soilbuild REIT for its young portfolio assets, strong financial position and proactive management. There is currently no change to our fair value of S$0.88 on Soilbuild REIT. Maintain BUY as upside potential remains compelling.
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.