• 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 DPUaccretive. 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.

Source: OCBC Research - 3 Sep 2014