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Contribution from Aussie assets expected to boost Soilbuild REIT

Samantha Chiew
Samantha Chiew10/19/2018 03:17 PM GMT+08  • 4 min read
Contribution from Aussie assets expected to boost Soilbuild REIT
SINGAPORE (Oct 19): Analysts are generally positive on Soilbuild Business Space REIT, despite a 9.4% y-o-y drop in 3Q DPU to 1.245 cents.
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SINGAPORE (Oct 19): Analysts are generally positive on Soilbuild Business Space REIT, despite a 9.4% y-o-y drop in 3Q DPU to 1.245 cents.

The REIT announced its 3Q18 results on Oct 17, which also stated that its income attributable to shareholders dipped 8.6% y-o-y to $13.2 million, while revenue was 3.6% lower at $19.8 million.

The decrease in revenue was mainly due to the divestment of KTL Offshore, as well as lower contributions from West Park BizCentral and Eightrium. But partially offset by higher revenue from Solaris.

See: Soilbuild REIT posts 3Q DPU decline by 9.4% to 1.245 cents

Following the results announcement, DBS is upgrading its call on Soilbuild REIT to “buy” from “hold” previously, with an increased target price of 65 cents.

In a Friday report, analyst Carmen Tay and Derek Tan says, “As industrial rents continue to bottom out, we believe the timely expansion into Australia and positive contributions from crown jewel Solaris will help anchor resilience and yields.”

This may help revive investor interest in SBREIT as DPU outlook reverts to positive trajectory after a three-year hiatus.

The analysts believe that REIT is worth a relook, on the back of attractive FY18-20 yields of 8.9-9.3%.

Despite weak 3Q18 results, the analysts believe that this has been largely priced in by the market. And this is set to change as contributions from the Australian assets kick in. Although Australia remains a new market for the REIT, strong demographics and still-attractive yields help mitigate downside risk and promotes growth.

“Coupled with positive reversions for Solaris which provide an earnings buffer, this should augment the resilience and even growth of DPUs hereon,” says Tay and Tan.

In addition, the analysts believe that the REIT may still be on the lookout for acquisition opportunities.

OCBC Investment Research is maintaining its “buy” recommendation on Soilbuild REIT with a lowered target price of 66.5 cents.

On a q-o-q basis, revenue in 3Q18 was 5.7% higher than 2Q18, but net profit income (NPI) was 0.1% lower, as the Solaris conversion saw higher revenue as well as higher property expenses.

In a Friday report, analyst Deborah Ong says, “We note that the DPU declines have moderated q-o-q – recall that 1Q18 and 2Q18 DPU fell 4.3% q-o-q and 4.5% q-o-q respectively.

During the quarter, rental reversions of 3.6% and -2.4% were recorded for renewals (including forward renewals) and new leases, compared to-9.7% (renewals) and -16.4% (new leases) in the previous quarter.

“After the briefing, we note that 3Q figures were skewed by Solaris leases (which posted high single-digit growth over the master lease rental) and believe that rental reversions for the wider portfolio came in closer to -10% or so,” says Ong.

The analyst expects Singapore’s industrial space to remain challenging for the rest of 2018, but take comfort in that only 3.1% of gross rental income is due for renewal (including underlying tenants at Solaris) for 4Q18.

Meanwhile, with the REIT’s recent completion of the Aussie acquisitions, Ong looks forward to a full-quarter contribution from the two new assets.

“Our forecasts remain largely unchanged, except that they now include the contribution from Soilbuild REIT’s Australian assets and the associated costs of the transaction,” adds Ong.

On the other hand, Jeffries is reiterating its “hold” call on Soilbuild REIT with a lowered fair value estimate of 62 cents.

The REIT’s Tuas Connection saw occupancy decline during the quarter, while WestPark Biz Central was stable and Eightrium Business Park saw an increase. But back filling of 72 Loyang Way is still a challenge.

In a Thursday report, analyst Krishna Guha says, “Among master lease properties, there may be tenancy risk for NK Ingredients and BK Marine (about 9% of gross revenue). The manager is actively engaging the tenant and is weighing various options. SBREIT has about 15% of rental income due for expiry in FY19, of which 9% is ex-Solaris.”

Meanwhile, average cost of debt increased by 8 basis points during the quarter to 3.42%. And including the Australian acquisitions, gearing is at 39.2%.

The REIT has $40 million debt that will be due for maturity next year.

“We factor in the AU acquisition, lower occupancy and positive rental reversions at Solaris. As such, our DPU estimates are up 4.5% for FY19. However, we attribute higher dividend yield spreads as the portfolio continues to experience tenancy risk,” says Guha.

As at 3.15pm, units in Soilbuild REIT are trading at 59 cents or 13.0 times FY19 earnings with a distribution yield of 8.8%.

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