• 6% down in <2 weeks
• Accumulate ahead of the curve
• FV remains at S$0.69

Down 5.9% in Less Than 2 Weeks

Soilbuild Business Space REIT (Soilbuild REIT) has dropped 5.9% since its 7 Sep announcement on the proposed acquisition of two Australian assets. The assets are two 100%-occupied Australian properties: a centrally located office in Canberra (“14 Mort Street”) for S$55.0m and a poultry processing plant in Adelaide (“Inghams Burton”) for S$61.3m.

The acquisitions are expected to be completed in 3Q18. Funding is likely to be a combination of

1. Australian dollar loans and
2. through the issuance of S$60m or S$100m perpetual securities.

Based on FY17 financials, DPU accretion from the acquisitions would be 1.19% (in the case of S$60m perps) or 0.14% (in the case of S$100m perps), on a pro forma basis. We believe that the recent decline in Soilbuild REIT’s unit price may have to do with concerns over the cost of perpetuals needed to fund the acquisition.

Positive on the Proposed Aussie Acquisitions

While we note the expected DPU accretion is minimal, we see this proposed acquisition as a right step for Soilbuild REIT’s portfolio as it 1) increases the operational stability of the portfolio with its geographical diversification, longer WALE and in-built rental escalation and 2) the acquisitions increase the average land lease to expiry of the portfolio.

Notably, 14 Mort Street has a 3.75% annual rental escalation while Inghams Burton’s rental escalation is pegged to the % change in Australian CPI. Post acquisition, the Australia properties are expected to make up 9.5% of Soilbuild REIT’s portfolio valuation.

Trading at 8.5% FY18F Yield as of 20 Sep

We expect the industrial space in Singapore 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. We look forward to the industrial sector bottoming end- 2018/early-2019 and believe that Soilbuild REIT is ready to participate on the upturn.

As at 20 Sep’s close, we see an opportunity to collect units in the REIT 2-3 quarters before stronger signs of operational improvement are seen. Soilbuild REIT is trading at 8.5% FY18F dividend yield and we continue to find the REIT attractively priced as at 20 Sep’s close.

We reiterate BUY on Soilbuild REIT with a fair value of S$0.69.

Source: OCBC Research - 21 Sept 2018