• Preferential Offering was oversubscribed
• Acquisition of Bukit Batok Connection has been completed
• Acquisition adds stability to the portfolio
• Cutting our estimates for Technics Offshore

What is the news?

Soildbuild Business Space REIT (SBREIT) announced the successful acceptance of its Preferential Offering (PO) and completion of the acquisition of Bukit Batok Connection.

There was a valid acceptance for a total of 83,550,598 New Units, with applications for additional New Units being in excess of provisional allotments under the PO. The PO was 1.74 times subscribed. A total of 94,353,672 New Units were allotted, inclusive of 10,803,074 Excess New Units. The New Units were issued at the issue price of S$0.63 per New Unit and gross proceeds was c.S$59.4 million. As a result of the strong demand for Excess New Units, Mr Lim Chap Huat, the Sponsor of Soilbuild REIT has only subscribed for his pro rata entitlement of approximately 23.7 million New Units.

In connection with the acquisition of Bukit Batok Connection for S$100.5mn, SBREIT has entered into a master lease agreement with SB (Westview) Investment Pte Ltd (SB Westview) for a term of seven years on a double net lease basis. Initial annual rental is S$8.0mn.

How do we view this?

Master lease arrangement adds stability and nudges up portfolio WALE

The master lease for Bukit Batok Connection is on a double-net basis. We understand from the Manager that the reason for that (instead of triple-net) is because the land rent for the property has already been paid up front. As disclosed by the Manager, portfolio weighted average lease expiry (WALE) gets extended to 4.4 years from 4.1 years, by net leasable area (NLA); and to 4.8 years from 4.6 years, by gross rental income (GRI).

Enlarged portfolio to mitigate uncertainties from multi-tenanted properties

SBREIT has three multi-tenanted properties within its portfolio – Eightrium, West Park Bizcentral and Tuas Connection. These three properties contributed 54.7% to portfolio GRI in FY15. On a pro forma basis, their contribution would be marginally lower at 52.5%, taking into consideration the partial contribution from Technics Offshore, which was acquired in 2QFY15 (May 2015). With the addition of Bukit Batok Connection into the portfolio, we estimate the multi-tenanted properties to contribute c.51% of FY16e GRI.

Higher gearing, higher finance costs and dilutive PO

We estimate that SBREIT had raised c.S$41.1mn of debt to complete the acquisition. Consequently, gearing edges up to c.37% from 36%, with marginal increase in interest expense. Distribution per unit (DPU) for the next four quarters is expected to be lower year-on-year (yoy) due to the 10% dilution, but Unitholders who did subscribe to their pro rata allotments would not be subjected to the dilution.

Technics Offshore remains the key drag to the portfolio, cutting our estimates for FY17e

As of end-2QFY16, the Manager was in negotiations with prospective tenants, to lease the property out piecemeal. We have assumed an occupancy of 60% from 3QFY17 onwards, coinciding with the depletion of the 18-months security deposit.

Downgrade to “Neutral” rating with lower DDM valuation of S$0.69 (previous: S$0.79)

Our new target price is lower than the previous, due to the 10% dilution to the Unitholder base and the effect of the lower occupancy expected at Technics Offshore.

Note: SBREIT will be announcing 3QFY16 financial results on 12 October, after trading hours.

Peer relative valuation

SBREIT is undervalued relative to the peer average P/NAV multiple, and offers a higher yield than both the peer average and the larger-capitalised peers.