• 1Q gross revenue and DPU in line with our forecast
• Cut FY17e/FY18e DPU forecast by 2.4%/2.3% on weaker than expected take-up rate for Loyang Way
• Leasing activity remains competitive with a mixed-bag for rental reversions, which was flat on a blended basis

• Higher gross revenue and lower DPU were in line with expectations

We had highlighted in our previous report (25 January 2017) that the acquisition of Bukit Batok Connection would offset the absence of contribution from Loyang Way, but DPU would be weighed down by the higher unit base. The acquisition of Bukit Batok Connection was partially funded through a 1-for-10 Preferential Offering.

• Lower gross revenue and DPU going forward, as Loyang Way security deposit is depleted

Portfolio gross revenue has been maintained in 1Q FY17, as the security deposit for Loyang Way was drawn down. Only S$1.3 million of the security deposit remains, as at 31 March 2017, which should last to mid-May 2017. The Manager has secured two tenants to occupy ~10% of the property, which is lower than our assumption of 60% occupancy. Going forward, one of the tenants is on a short-term lease while the other will sign a 3-year lease, occupying ~7% of the property. We have lowered our forecast due to weak Loyang Way occupancy (now assume 30% occupancy end 2017). Loyang Way contributed 10% to FY16 portfolio gross revenue. We cut our FY17e/FY18e DPU by 2.4%/2.3%.

• Manageable lease expiry of 12.6% by net lettable area (NLA) for the remainder of 2017

Lease renewals and forward lease renewals were flat on a blended basis. Portfolio occupancy improved quarter-on-quarter (qoq) to 91.8% from 89.6% mainly due to higher occupancy at Tuas Connection (short-term leases) and West Park BizCentral. In contrast, portfolio weighted average lease expiry (WALE) by gross rental income dipped qoq to 3.3 years from 3.4 years; we believe due to the short-term leases within the portfolio. Leases expiring in 2017 mainly come from Tuas Connection and West Park BizCentral, concentrated in 2H 2017.

Maintain “Neutral” rating with lower target price of S$0.66 (previous: $0.68)

The price of Soilbuild Business Space REIT (SBREIT) has appreciated ~8% over the last month. We believe this to have been driven by market optimism of a consolidation among the smaller capitalised REITs, including SBREIT. However, we there are numerous hurdles to a consolidation, such as determining a conversion factor from existing units to units in the new REIT, as well as selection of a new team to form the new Manager.

Our target price gives an implied FY17e P/NAV multiple of 0.93x, which we believe to be fair, when taken in the current context of SBREIT being one of the smaller capitalised REITs.

Relative valuation

Soilbuild Business Space REIT (SBREIT) is relatively undervalued to the peer average P/NAV multiple, and offers a higher yield compared to the peer average as well as the larger-capitalised peers.