• 1Q16 DPU slipped 4.7% YoY
• 94.8% occupancy rate
• FV lowered but still a BUY

1Q16 results within our expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported its 1Q16 results which came in within our expectations. Gross revenue rose 8.2% YoY to S$20.1m, largely due to additional rental contribution from Technics and Solaris, but partially offset by a dip in revenue from West Park BizCentral and Tuas Connection. This formed 23.9% of our FY16 forecast.

Although Soilbuild REIT’s distributable income consequently increased 9.6% YoY to S$14.6m, its DPU fell 4.7% to 1.557 S cents as a result of a larger unit base from a private placement exercise carried out in Apr 2015. This constituted 23.9% of our full-year projection.

Drag from two multi-tenanted buildings

As mentioned earlier, Soilbuild REIT’s results were impacted by lower revenue from two of its multi-tenanted buildings. Occupancy for West Park BizCentral declined from 94.2% (as at 31 Dec 2015) to 92.3%, while Tuas Connection suffered a bigger sequential dip of 7.2 ppt to 86.3%. Overall portfolio occupancy slipped from 96.8% to 94.8%.

During the quarter, Soilbuild REIT secured 282,920 sq ft of renewals and new leases. The renewal leases were signed with a positive rental reversion of 6.6%, while forward renewal leases registered a slight rental decline of 0.6%. For the remainder of 2016, management has 7.2% (or ~250,000 sq ft) of lease expiries (by both NLA and gross rental income) to work on.

Pare our forecasts but maintain BUY

We lower our FY16 and FY17 DPU forecasts by 4.4% and 4.2%, respectively, as we opt to input higher finance costs and more conservative occupancy rate assumptions for West Park BizCentral and Tuas Connection in our model.

Consequently, our DDM-derived fair value estimate is trimmed from S$0.85 to S$0.82. Notwithstanding our reduced projections and fair value, we opine that valuations for Soilbuild REIT remain attractive, as the stock still trades at FY16F distribution yield of 8.3%. This comes in ~0.7 standard deviations above its forward mean of 8.0% since its IPO. Maintain BUY.

Source: OCBC Research - 15 Apr 2016