• 1Q15 DPU grew 4.5% YoY
• 100% occupancy rate
• FY15F distribution yield of 7.7%

1Q15 results within our expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported its 1Q15 results which met our expectations. Gross revenue jumped 10.5% YoY to S$18.6m, underpinned by additional rental revenue from three new properties acquired in 2Q14 and 4Q14. This formed 24.8% of our FY15 forecast. DPU was up 4.5% YoY to 1.633 S cents and constituted 25.3% of our full-year estimate.

Operationally, Soilbuild REIT maintained its portfolio occupancy rate of 100% (as at 31 Mar 2015), while positive rental reversions of 9.3% for lease renewals were achieved in 1Q15. Although 18.4% of Soilbuild REIT’s NLA is expiring in FY15, this is an improvement from the 29.7% figure at the start of the year, which reflects management’s proactive renegotiation efforts.

Industry headwinds may weigh on occupancy rate

Notwithstanding the healthy 100% tenant retention rate in 1Q15, management cautioned that this is unlikely to be sustained for the rest of the year. We believe this can be attributed largely to macroeconomic headwinds and increased competitive pressures from the large upcoming supply of factory space in Singapore. The bulk of Soilbuild REIT’s remaining lease expires in FY15 and comes from its West Park BizCentral and Tuas Connection properties.

Maintain BUY

In terms of capital management, Soilbuild REIT has hedged 81.9% of its total debt. Its average all-in interest cost stands at 3.28%, as at 31 Mar 2015, a slight uptick of 9 bps versus end-2014. Current aggregate leverage ratio has also increased from 35.4% (as at 31 Dec 2014) to 38.5%, as this includes the interest free loan from its sponsor and deferred payment in relation to the Solaris upfront land premium to be paid to JTC.

On the acquisition front, management plans to complete the purchase of 72 Loyang Way by end 2Q15 (total acquisition cost of S$98.1m), and we believe this would be financed by both debt and equity. Pending the finalisation of the funding structure, we have not incorporated this acquisition in our model. Maintain BUY and S$0.93 fair value on Soilbuild REIT, as the stock still offers an attractive FY15F distribution yield of 7.7%.

Source: OCBC Research - 15 Apr 2015