Soilbuild REIT - OCBC Investment 2019-04-22: Issues With NK Ingredients Continue


Soilbuild REIT - Issues With NK Ingredients Continue

  • Weak 1Q19, but within expectations.
  • Trading at 7.9% FY19F yield as at 19 Apr.
  • Fair Value remains at S$0.62.

Soft 1Q19 results in line with expectations

  • SOILBUILD BUSINESS SPACE REIT (Soilbuild REIT, SGX:SV3U)'s 1Q19 results were within expectations. NPI grew 7.7% y-o-y to S$18.3m, but this was offset by an increase in funding costs and the amount reserved for distribution to perpetual security holders. As a result, distributable income fell 8.7% y-o-y to S$12.7m.
  • DPU for the quarter fell 9.5% y-o-y to 1.198 S cents, making up 24.2% of our initial full year forecast.

Divestment of 72 Loyang Way is welcome

  • On 21 Mar 2019, Soilbuild REIT's manager announced the proposed divestment of 72 Loyang Way for S$34.08m, just slightly above its valuation of S$34.0m by Colliers. We see this as a positive, given that
    1. it has been a struggle to find a suitable replacement for the anchor tenant at the property, and
    2. the remaining land lease tenure is relatively short at 19 years.
  • With the divestment, the weighted average land lease by valuation is expected to improve from 47.4 years (as at 31 Dec 2018) to 48.2 years. Furthermore, the net sale proceeds could be used to reduce the aggregate leverage, thus lowering finance costs.

However, there are challenges at NK Ingredients

  • Negative rental reversions of 2.5% and 4.0% were recorded for renewals and new leases respectively during the quarter. While we note that rental reversions are getting less negative, challenges remain at NK Ingredients and Eightrium.
  • Tenant NK Ingredients is in the midst of restructuring and has applied for a moratorium pending its proposal of a Scheme of Arrangement to its creditors. The amount currently owed to Soilbuild REIT is ~S$2.3m, slightly less than the ~S$2.6m security deposit held by Soilbuild REIT.
  • The Singapore High Court has granted a moratorium (ending 20 May 2019) subject to NK Ingredients making rental payment for both April and May. The rent for April has been paid. This issue will continue to weigh on our dividend forecasts for Soilbuild REIT. As for mitigating factors, we understand that there have been ongoing discussions with a replacement tenant for over six months.
  • Meanwhile, we note that tenant DBS GROUP HOLDINGS LTD (SGX:D05) has not renewed their lease at Eightrium, where they take up 30k sqft (~17% of Eightrium’s NLA but ~0.7% of total portfolio’s NLA).
  • As at 19 Apr’s close, Soilbuild REIT is trading at 7.9% FY19F dividend yield.
  • We maintain our HOLD rating on Soilbuild REIT as well as our fair value of S$0.62.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-04-22
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.620 SAME 0.620