• 2Q results within expectation
• Look forward to Solaris conversion
• FV disp to S$0.69

2Q results show signs of stabilization QoQ Soilbuild Business Space REIT’s (Soilbuild REIT) 2Q18 results were within expectations with 1H18 NPI dropping 12.4% YoY to S$33.2m, or 50.0% of our initial full-year forecast. 1H18 DPU dropped a corresponding 12.4% YoY to 2.588 S cents, or 50.8% of our initial full-year forecast. We see signs of stabilization on a QoQ basis – 2Q18 NPI fell 4.4% QoQ and this was mainly due to the divestment of KTL Offshore in Feb 2018. The portfolio occupancy rate remains steady at 87.6%.

Boost From Solaris Conversion in Aug?

Looking ahead, the REIT manager expects to benefit from the conversion of the Solaris master lease to a multi-tenanted building in Aug 2018. Given that the underlying rents for the asset are higher than what is implicitly offered by the master lease, we expect the conversion to result in a 4% to 5% increase in Solaris’s NPI in absolute terms which should support FY19 numbers.

We do remain cautious on the upcoming business park supply in one-north. In particular, we note that Boustead Projects expects to complete construction of “Alice,” a nearby multi-tenanted building, by 4Q18.

From what we understand, underlying rents at Solaris are currently at par with the asking rents of new buildings in the vicinity, but higher than older buildings as well as incoming supply. Fortunately, Solaris’s leases expiring in 2019 make up only around 6.7% of the entire portfolio’s leases by gross rental income.

Trading at 7.7% FY18F Yield as of 17 Jul Close

Since our upgrade from Hold to Buy on 29 Mar, Soilbuild REIT has posted total returns of 2.8% versus the FTSE Straits Times Real Estate Investment Trust Index’s 1.0%. We expect the industrial space to remain challenging for most of 2018, but take comfort in that only 9.6% of gross rental income is due for renewal (including underlying tenants at Solaris) for the rest of the year.

Due to macro uncertainties as well as the rising interest rate environment, our cost of equity increases from 8.5% to 8.8% and our fair value dips from S$0.71 to S$0.69. We continue to find the REIT attractive as at 17 Jul’s close. Maintain BUY.

Source: OCBC Research - 18 Jul 2018