• We hosted Soilbuild Business Space REIT (SBREIT) for a non-deal roadshow on 2 July.
• Existing strong alignment of interests between Manager, Unitholders and Sponsor is in line with MAS Consultation Paper.
• Tenant demand as well as investor confidence from the debt and equity markets is testament to the REIT's best-in-class portfolio.

Investment Actions

We remain positive on SBREIT for the positive underlying fundamentals of its portfolio, exposure to niche sub-sector of Business Park space, and its strong alignment of interests between Manager, Unitholders and Sponsor.

At 1.07x P/NAV (undervalued relative to larger market capitalised Industrial S-REITs) and forward yield of 7.8%, we believe that there is still room for yield compression for SBREIT. Maintain Buy with DDM valuation of S$0.995.

Key takeaways

Competitive advantage of being the only Industrial S-REIT to have a Sponsor with an integrated platform. Capabilities are housed within the Soilbuild family and include Construction, Development, Lease Management, Asset/Property Management and Fund Management.

Strong alignment of interests between Manager, Unitholders and Sponsor. Manager's Base Fee is pegged to Distributable Income (instead of Deposited Property value), while Performance Fee is pegged to growth in DPU (instead of percentage of Gross Revenue or Net Property Income). Consequently, the Manager's remuneration is strongly aligned to the REIT's performance at the bottom-line. The Sponsor currently has a 24% stake in the REIT.

Best-in-class portfolio that has 100% occupancy. Properties are strategically located, relatively young (weighted average age of 5.8 years) and of high quality design. This has resulted in strong tenant demand from good quality tenants , giving stability to property income for the portfolio. The portfolio also enjoys the longest underlying land lease expiry (46.5 years) among its Industrial S-REIT peers.

Supply-demand dynamics. While new industrial space coming online in 2015 (2.1 million sqm) and 2016 (2.5 million sqm) will be higher than the historical average (1.0 to 1.5 million sqm), there will be a limited supply pipeline in the sub-sectors of Business Parks and Hi-Specs together with high level of pre-commitment. Rental Index for Business Park has been creeping upwards, indicating the favourable demand for such space.

Inorganic growth through third-party acquisitions and Right of First Refusal (ROFR) pipeline. Third-party acquisitions likely to be on master leases and of traditional industrial property types. Next ROFR acquisition could be in the early part of 2016 after stabilisation, as the property has just received TOP and is in the process of being leased out.

Investor confidence in recent developments: Equity Fundraising (EFR) & Medium Term Note (MTN) Issuance. Completed S$90 million placement, being the first S-REIT EFR in 2015; reducing pro-forma gearing to 36.1%. Successful issuance of S$100 million 3.45% fixed rate notes due in 2018. Both issues were a few times over-subscribed.

Note: SBREIT will be announcing 2Q FY15 financial results on 14 July after trading hours.

Source: Phillip Securities Research - 3 Jul 2015