Positive tone on outlook

• 2Q14 DPU above prospectus forecast
  
• Continued focus on lease management
  
• Financial position remains robust
  

2Q14 results within expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported a firm set of 2Q14 results, with gross revenue of S$16.7m coming in 0.9% higher than its prospectus forecast and NPI of S$14.0m 3.4% above forecast. The positive topline performance was due to new revenue stream from Tellus Marine (acquisition completed in May), while NPI was boosted further by lower maintenance costs incurred for both Eightrium and Tuas Connection. Distributable income and DPU, on the other hand, stood at S$12.1m and 1.50 S cents, both at 1.3% ahead of the respective forecasts. Together with 1Q distribution, 1H14 DPU amounted to 3.062 S cents and formed 49.8% of our full-year DPU projection. This is in line with our expectations, as Tellus Marine will make full-quarter revenue contribution for the rest of year.

Outlook remains sanguine

We note that management remains confident in delivering its forecast distribution for FY14, notwithstanding the current challenges in the industrial market and upcoming supply in industrial space in the year ahead. To achieve this, Soilbuild REIT will continue to focus on early renewals or re-leasing of space that expires in 2H14. We understand that over 85% of all lease expiries due in 2014 has already been renewed, re-leased or pre-committed, which should provide a high degree of certainty to its income stream. For 2Q14, leasing activity appears healthy in our view, as leases secured/renewed all saw positive rental reversions ranging from 3.6% to 31.7%. Only the portfolio occupancy dipped slightly from 100% in 1Q to 98.5% due mainly to a non-renewing lease expiring in Tuas Connection.

Maintain BUY

As at 30 Jun, Soilbuild REIT’s aggregate leverage also remained robust at 30.3% (1Q: 29.1%), providing it good debt headroom for future acquisitions. All-in interest costs dropped slightly from 3.12% in 1Q to 3.08% as Soilbuild REIT drew down debt facility on floating rate to fund the acquisition of Tellus.

Tellus Marine in 2Q. While its fixed interest rate exposure is reduced 5ppt to 95%, this is still higher than the sector average. We maintain BUY and S$0.88 fair value on Soilbuild REIT.

Strength despite cautious backdrop

• 1Q14 DPU up 6.1% YoY
  
• Portfolio assets fully occupied
  
• Proposed acquisition to augment earnings
  

1Q14 results above prospectus forecasts

Soilbuild Business Space REIT (Soilbuild REIT) delivered a strong set of 1Q14 results, with NPI of S$14.2m and distributable income of S$12.6m coming in 5.3% and 6.1% higher than its respective prospectus forecasts. The better performance was mainly attributable to higher revenue, a one-off pre-termination income of S$0.4m from a tenant, and lower property and finance expenses. Similarly, DPU of 1.562 S cents was 6.1% higher than its forecast. Excluding the one-off item, we note that DPU would have been circa 1.51 S cents, largely within market expectations (25.2% of consensus and our FY14F DPU).

Further improvements in operating metrics

Soilbuild REIT‟s portfolio occupancy reached 100% (4Q13: 99.9%), following the expansion of space by one tenant and new take up by another tenant at Eightrium during the quarter. Consistent with our channel checks, the 29,041 sqft space at Eightrium that was vacated by Barclays upon its lease expiry in Mar has been taken up by DBS Bank (two year lease tenure signed at market rates). In our view, this is a positive development given that the rental market at Changi Business Park has become increasingly competitive. For the three lease expires in 1Q, we understand that an average rental reversion of 6.6% was achieved. Notably, Soilbuild REIT has also forward-renewed five leases (2.8% of portfolio NLA) expiring in 1Q15 at rents 13.9% higher than preceding contracted rates.

Maintain BUY

Looking ahead, management believes that it is well placed to deliver on the forecasts set out in its prospectus, underpinned by its continued focus on early renewals for its lease expiries and cost containment. As announced in Mar, Soilbuild REIT has entered into an agreement to acquire 39 Senoko Way, an industrial property in Woodlands. With the deal expected to be yield-accretive, we believe its earnings profile will be further enhanced upon its expected completion in 2Q. We maintain BUY on Soilbuild REIT, but raise our fair value marginally higher to S$0.88 from S$0.87 after incorporating the positive 1Q showing.

Maiden acquisition

• Maiden acquisition in Woodlands
  
• Accretive deal; FY14-15F earnings raised by c1.5% each
  
• BUY, TP raised to S$0.89 based on DCF
  

Maiden acquisition in Woodlands. Soilbuild REIT (SBREIT) announced it has acquired 39 Senoko Way, from Tellus Marine Engineering Pte Ltd for a total consideration of S$18m. The property will be acquired in two phases – an existing 4-storey industrial property (c. S$14.6m) and a proposed construction of a single storey warehouse (S$3.4m). Upon completion of both phases of the acquisition, the property will have total GFA of 95k sqft and sits on a long remaining lease tenure of 40 years (including a 30 year extension).

Accretive acquisition with long WALE, gearing to increase to c. 30.7%. The property will be leased back to the vendor, Tellus Marine Engineering Pte Ltd on a triple net basis for a period of 10 years offering good income visibility to SBRIET. The property is estimated to contribute c. 2% to portfolio and revenues. The initial yield is estimated to be north of 7.5%, which is higher than the portfolio average of 6.3%, implying that the deal will be earnings accretive to SBREIT. Given sufficient debt headroom, SBREIT will be funding this acquisition using debt and gearing is estimated to increase to c. 30.7%.

Maintain BUY, TP S$0.89. We have raised FY14-15F earnings by c1.5% each as we include this acquisition in our forecasts. Yields are attractive at c7.9-8.5%, one of the highest amongst the industrial REITs. Maintain BUY, TP revised slightly higher to S$0.89 based on DCF.

Bite-size addition, but positive attributes

• Long leaseback term of 10 years
  
• Attractive NPI yield and rental step-ups
  
• Possible DPU accretion of 0.13 S cents
  

Maiden third-party acquisition

Soilbuild Business Space REIT (Soilbuild REIT) announced last Friday the proposed acquisition of an industrial property known as 39 Senoko Way in Woodlands, Singapore from third-party vendor Tellus Marine Engineering Pte Ltd (Tellus Marine). The total cost of the transaction is expected to be S$18.3m, comprising the purchase price of S$18.0m (S$189 psf GFA) and other acquisition-related expenses. Upon completion of the deal (around Apr 2014), Soilbuild REIT will lease the property back to Tellus Marine for a term of 10 years via triple-net lease arrangement.

More details on transaction

39 Senoko Way consists of an existing four-storey industrial building and a proposed single storey workshop which is expected to complete construction no later than nine months from the completion of the acquisition. The property is held under a JTC lease with a remaining land lease tenure of 10 years and an option to extend by another 30 years, subject to terms and conditions of the JTC lease. Management believes that the proposed acquisition will provide an additional growth driver, stable income as well as diversification to its portfolio assets. We understand that the property is expected to generate an initial NPI yield ranging 7.8%- 8.0% and offer an annual rental escalation of 2.5%. This is higher than that seen in most of its existing assets.

Maintain BUY

We anticipate Soilbuild REIT to fund the acquisition wholly by debt and internal resources, as its gearing ratio has remained very robust at 29.3%. Based on our projections, the new addition is likely to add an annualized 0.13 S cent to Soilbuild REIT’s DPU. We now incorporate the acquisition in our forecasts. Accordingly, our fair value is lifted slightly from S$0.85 to S$0.87. Maintain BUY on Soilbuild REIT as the total expected return remains compelling.

First third‐party acquisition since August 2013 IPO. On 11 March 2013, Soilbuild REIT signed a conditional sale and purchase agreement with Tellus Marine Engineering Pte Ltd (“Tellus Marine”) for the acquisition of 39 Senoko Way. The property consists of an existing four‐storey industrial building and a proposed extension, a single storey workshop, and has 10 years remaining on its lease (expiry February 2024), with the option of a further 30‐year term. Upon completion of the acquisition in 2Q2014, the building will be leased to Tellus Marine, the current occupant, under a triple‐net lease for a term of 10 years. The cost of the acquisition is S$18.3m, including a purchase consideration of S$18.0m and other acquisition related costs.

First step towards growth. We like the 10‐year leaseback term with annual rental step‐ups, and believe the acquisition will be DPU accretive as the median rent for Senoko Way properties stood at S$1.7psf in 2013. Also, we noted in January 2014 that Soilbuild REIT has an additional debt headroom of S$79.9m at its current aggregate leverage of 29.3%. Assuming the acquisition is fully funded by debt, we estimate aggregate leverage increases to 30.7%, a reasonable level in our view.

Reiterate BUY, TP S$0.90. We like Soilbuild REIT for its consistent performance: exceeding its forecast DPU by 3% and managing borrowings prudently to achieve a lower all‐in interest rate of 3.12% versus the forecast rate of 3.28% in its prospectus. We estimate the acquisition to add 3 cents to our previous fair value of S$0.87, assuming a S$2.00 psf rental rate, 2.5% annual rental step‐ups, and the completion of the proposed extension in 2Q15. This increases our forecast FY2014 DPU by 0.5% to 6.2 cents and FY2015 DPU by 3.0% to 5.7 cents. Our forecast DPU provides a generous 8.1% yield over the last traded price of S$0.765.