• 3Q16 DPU fell 13.9% YoY
• Portfolio occupancy improved
• Outlook still challenging

3Q16 results within expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported its 3Q16 results which came in within our expectations. Gross revenue decreased 4.7% YoY to S$19.7m, and this was largely attributed to weaker rental income from West Park BizCentral and Tuas Connection. DPU fell 13.9% YoY to 1.399 S cents as a result of an enlarged unit base from its 1 for 10 preferential offering exercise, while material contribution from its Bukit Batok Connection (BBC) acquisition has yet to kick in as the purchase completion took place only on 27 Sep 2016. Adjusting for the effects of the preferential offering, Soilbuild REIT’s DPU would have declined 5.7% YoY to 1.533 S cents. For 9M16, Soilbuild REIT’s gross revenue rose 0.9% to S$59.4m and formed 71.2% of our fullyear forecast. DPU of 4.521 S cents represented a dip of 7.2% and constituted 72.9% of our FY16 projection.

Outlook remains challenging

Operationally, Soilbuild REIT managed to lift its portfolio occupancy from 92.0% (as at 30 Jun 2016) to 94.8% (94.2% if we exclude the BBC acquisition). However, negative rental reversions of 6.6% were registered for its forward renewal leases in 3Q16. Out of the 15.3% of leases (by NLA) expiring in FY17, management has successfully completed forward renewals of 2.3%. We believe the leasing environment remains challenging, and this would continue to exert pressure on rental and occupancy rates.

Trim forecasts but maintain BUY

While we expect a QoQ improvement in Soilbuild REIT’s 4Q16 results, we see the need to lower our FY16 and FY17 DPU forecasts by 2.7% and 2.8%, respectively, largely due to lower occupancy rate assumptions at Tuas Connection and West Park BizCentral. Consequently, our fair value estimate is trimmed from S$0.78 to S$0.77. Although we maintain our BUY rating on Soilbuild REIT, we believe further downside risks to our projections could stem from management’s failure to secure replacement tenants at its 72 Loyang Way property once the security deposit is exhausted next year.

Source: OCBC Research - 13 Oct 2016