• Estimated initial NPI yield of 7.6%
• Provides rental stability
• Raising our cost of equity assumption

Recently proposed to acquire a ROFR asset from sponsor

Soilbuild Business Space REIT (Soilbuild REIT) recently entered into a sale and purchase agreement with SB (Westview) Investment Pte Ltd (SB Westview), a subsidiary of its sponsor Soilbuild Group Holdings, for the proposed acquisition of a property known as Bukit Batok Connection. The purchase consideration is S$96.3m. Including stamp duties and other acquisition fees, the total cost works out to be ~S$100.5m. Upon completion of the acquisition, Soilbuild REIT will lease back the property to SB Westview on a seven-year master lease (doublenet lease basis).

Asset to provide rental stability, but partial equity financing likely

Bukit Batok Connection is a nine-storey ramp-up light industrial development with a NLA of 377,776 sq ft. It is in close proximity to Bukit Batok MRT and also surrounded by a mix of residential, industrial and retail developments. The annual rental is S$8.0m for the initial year, with subsequent rental escalations of up to 2.0% per annum. We estimate that the proposed acquisition will be transacted at an initial NPI yield of 7.6%. The asset will also provide rental stability to Soilbuild REIT given its long lease. However, we believe funding will come from both debt and equity, depending on market conditions.

Lower FV but maintain BUY

As Soilbuild REIT will only convene an EGM to seek Unitholders’ approval on this proposed acquisition in Aug, and the funding structure mix has yet to be finalised, we opt to leave our financial forecasts unchanged for now. But if we assume a debt/equity funding mix of 60%/40%, our FY17 DPU forecast would increase by 2.4% and our aggregate leverage estimate would be 37.0%.

Given the current market volatility and uncertainty surrounding Soilbuild REIT’s 72 Loyang Way property in which it is seeking a replacement tenant following Technics Offshore Engineering Pte Ltd’s rental payment default, we raise our cost of equity assumption from 8.6% to 9.2%. Our fair value estimate is consequently lowered from S$0.82 to S$0.76.

As Soilbuild REIT’s share price has already softened 6.4% since the Technics’ rental default announcement, we believe the market has priced in the negatives. Maintain BUY, supported by FY16F distribution yield of 9.4%.

Source: OCBC Research - 28 Jun 2016