• 2Q DPU drops 6.3% YoY
• Loyang is the wild card
• FY17F yield of 8.0%

2Q17 Results Within Expectations

Soilbuild Business Space REIT (Soilbuild REIT) reported 2Q17 gross revenue of S$21.6m, representing an increase of 10.1% YoY and 25.2% of our full-year forecast. DPU fell 6.3% to 1.466 S cents, partly due to payment of property management and lease management fees in cash instead of units. 2Q17 DPU came in within our expectations at 25.6% of full-year forecast. Portfolio occupancy rose from 91.8% (as at end- 1Q17) to 92.6%.

For leases renewed during the quarter, rental reversions were relatively flat while for renewals secured in advance, a -9.8% reversion was clocked. In 2H17, 7.6% of Soilbuild REIT’s portfolio NLA is up for renewal.

72 Loyang Way Occupancy Increases 12.9ppt to 22.8%

The security deposit received for 72 Loyang Way has been fully utilized during the quarter; the asset’s occupancy came in at 22.8% in 2Q17, up from 9.9% in 1Q17. Recall that 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. We currently project that the 30% of the space will successfully be leased out by FY18, while the other 70% of the NLA will remain unoccupied till FY20.

Reiterate HOLD

With a change in covering analyst, we apply a DDM using our new DPU estimates with a lower cost of equity (9.3% instead of 9.7% previously). Despite the significant headwinds facing Soilbuild REIT’s multi-tenanted assets, we believe the REIT will be buffered by the stability of contributions from its numerous master leased assets as well as the prospect of a bottoming market in the industrial space this year.

The upcoming expiry of the Solaris master lease is expected to be largely NPI neutral based on our projections. As a result of some adjustments, our FY17F DPU increases from 5.7 S cents (previous forecast) to 5.9 S cents (current forecast).

Our fair value increases from S$0.64 to S$0.67. Based on our new projections and last Friday’s closing price, Soilbuild REIT is trading at a P/B of 1.0x and a distribution yield of 8.0% for FY17F. We maintain HOLD with a fair value of S$0.67.

Source: OCBC Research - 17 Jul 2017