The outlook is negative due to multiple tenant defaults in the portfolio – Technics Offshore Engineering, NK Ingredients and KTL Offshore. Rental revisions during the quarter were -4.0% compared to -9.8% in 2Q17. The manager expects negative reversions to persist into 2018. We believe industrial rent to bottom in 2018, on tapering new supply.
Downgrade to Reduce, lower target price of S$0.64 (previously $0.73)
We raise our discount rate from 6.9% to 7.9% on the basis of higher uncertainty in future cash flows. Our target price represents an implied FY17e P/NAV multiple of 0.90x.
SBREIT is relatively undervalued to the peer average P/NAV multiple, and has a higher yield compared to the peer average. We believe the higher yield compared to peers is a reflection of the risk of the portfolio going forward.