• 4Q16 DPU fell 2.7% YoY
• Uncertain outlook
• Lower FV and downgrade to HOLD

4Q16 results within expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported 4Q16 gross revenue of S$21.7m, which was an increase of 6.1% on a YoY basis. NPI rose 8.0% to S$18.9m, but DPU fell 2.7% to 1.57 S cents, and this can be attributed mainly to higher finance expenses and an enlarged unit base as a result of its preferential offering exercise.

For FY16, Soilbuild REIT’s gross revenue rose 2.3% to S$81.1m and formed 99.6% of our full-year forecast. DPU of 6.091 S cents represented a decline of 6.1% but was 0.9% above our FY16 projection. Soilbuild REIT suffered fair value losses of S$50.9m for its investment properties in FY16 due largely to lower valuation at 72 Loyang Way, West Park BizCentral and Tuas Connection.

Uncertainties over its 72 Loyang Way property

Soilbuild REIT announced on 9 Dec last year that it had terminated the lease agreement with Technics Offshore Engineering Pte Ltd (subsidiary of Technics Oil & Gas) at its 72 Loyang Way property and is currently searching for replacement tenants. As at the date of announcement, ~S$3.9m of the security deposit received remained unutilised, which equates to approximately five months’ rent and property operating expenses. As a result of this termination, portfolio occupancy fell 5.2 ppt QoQ to 89.6%, as at 31 Dec 2016.

Soilbuild REIT is currently seeking JTC’s approval to allow the leasing of the property to non-waterfront users for the short-term but there is no certainty as to whether approval would be granted. We adopt a more conservative stance and now factor in lower margin and occupancy and rental rate assumptions for this property. This results in a paring of our FY17 and FY18 DPU forecasts by 7.2% and 9.7%, respectively.

Headwinds exist, downgrade to HOLD

We also raise our cost of equity assumption from 9.0% to 9.7% after factoring in a higher risk-free rate and beta input in light of a steeper yield curve environment and potential volatility in earnings ahead. Following the aforementioned changes, our fair value estimate dips from S$0.77 to S$0.64. We downgrade Soilbuild REIT to HOLD from ‘Buy’, as we believe uncertainties surrounding its 72 Loyang Way property and unfavourable demand and supply industry dynamics may cast an overhang over its share price.

Source: OCBC Research - 25 Jan 2017