Soilbuild REIT - OCBC Investment 2017-09-20: Tenant NK Ingredients In Arrears

Soilbuild REIT - OCBC Investment 2017-09-20: Tenant NK Ingredients In Arrears SOILBUILD BUSINESS SPACE REIT SV3U.SI

Soilbuild REIT - Tenant NK Ingredients In Arrears

  • FY17 DPU protected by guarantee.
  • Uncertainty going forward.
  • Fair Value estimate drops to S$0.66.

Letter of demand issued to tenant NK Ingredients 

  • The trustee of Soilbuild Business Space REIT (Soilbuild REIT) has issued a letter of demand to master lease tenant NK Ingredients Pte. Ltd. (NK) for arrears amounting to S$3.4m, and has called upon an insurance guarantee amounting to S$5.1m. The S$1.7m balance of the guarantee is equivalent to ~4 months of rent.

Sizeable tenant within the portfolio 

  • The REIT Manager does not expect there to be a material financial impact on FY17F DPU given the insurance guarantee. However, based on Soilbuild REIT's calculations, 1H17 DPU would have been 10.7% lower at 2.640 S cents should the lease have been terminated as at 1 Jan 2017.
  • We note that NK contributed 6.8% of the FY16 NPI. The property currently leased to NK consists of seven blocks of office, laboratory, warehouse and production facilities. It is currently used for lanolin, lanolin derivative and cholesterol production. 
  • Should the lease with NK be preterminated, Soilbuild REIT will need one or multiple new anchor tenants – preferably also within the chemicals industry – to occupy at least 70% of the NLA.

Outcome remains to be seen 

  • We believe there is now greater uncertainty regarding future income streams for the asset in FY18 and beyond. 
  • Given the limited details regarding NK’s financial health, we apply a 65% chance that the tenant will be unable to repay its arrears within seven days from the call of the insurance bond and will consequently have its lease pre-terminated. For this scenario, we assume the asset will clock ~20% average occupancy from mid-Oct 2017 to mid-2018, ~30% from mid-2018 till end-2019, and ~100% thereafter. For the alternative scenario whereby NK pays its arrears in time, we assume that it will continue as a master lease tenant till 2028 and beyond. 
  • Following the adjustments, our fair value drops from S$0.67 to S$0.66. Our probability-based forecasts now imply a -12% YoY DPU growth for FY18 (-8% previously). Nonetheless, the impact of this issue on our fair value is less dramatic as we still expect the asset to enjoy 100% occupancy in FY20 and beyond in either scenario. 
  • Maintain HOLD.

Deborah Ong OCBC Investment | 2017-09-20
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.660 Down 0.670