• 1Q17 DPU fell 4.4% YoY
• Improvement in leasing environment
• FY17F distribution yield of 8.4%

1Q17 results within expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported 1Q17 gross revenue of S$22.0m, representing an increase of 9.2% YoY. This formed 25.8% of our FY17 forecast. NPI jumped 11.7% to S$19.2m and this was driven by contribution from the acquisition of Bukit Batok Connection which was completed on 27 Sep 2016, higher revenue from Solaris, Tellus Marine and Tuas Connection and lower property tax at West Park BizCentral. DPU fell 4.4% YoY to 1.489 S cents but was within our expectations, accounting for 26.0% of our full-year projection. The dip was attributed to an enlarged unit base from its preferential offering exercise last year and management’s decision to pay the property management fee and receive its lease management fee in cash instead of units.

Slightly more positive outlook but uncertainties remain

There were some positive takeaways from Soilbuild REIT’s 1Q17 results, as portfolio occupancy rose from 89.6% (as at end-FY16) to 91.8% due largely to improved occupancy at Tuas Connection and West Park BizCentral. Its 72 Loyang Way property is currently 9.9% occupied following the termination of the lease agreement with Technics Offshore Engineering Pte Ltd in Dec last year. Soilbuild REIT still has S$1.3m of the security deposit which remains unutilised, as at 31 Mar 2017, but we believe this would be exhausted around the middle of May.

From our understanding, Soilbuild REIT has obtained approval from JTC to lease out up to 30% of the property’s GFA to non-oil and gas related tenants. As such, Soilbuild REIT managed to secure tenancies from the Construction and Precision Engineering trade sectors.

Rental reversions for the quarter came in mixed, with positive rental uplifts of 3.6% for renewal leases, but forward renewal leases clocked in negative rental reversions of 6.0%. While the leasing environment has improved, rental reversions are likely to remain soft. There are also uncertainties as to how quickly Soilbuild REIT will be able to find an anchor tenant for its 72 Loyang Way asset.

Reiterate HOLD

We make no changes to our forecasts, HOLD rating and S$0.64 fair value estimate. Based on our projections, Soilbuild REIT offers a distribution yield of 8.4% for FY17F.

Source: OCBC Research - 13 Apr 2017