SINGAPORE (Apr 18): OCBC Investment Research is maintaining its “buy” call on Soilbuild Business Space REIT (SB REIT) with a higher fair value estimate of 71 cents compared to 70 cents previously.
On the contrary, Jefferies has downgraded its call on the REIT from “buy” to “hold” with an unchanged target price of 70 cents after lowering FY18 and FY19 DPU estimates for SB REIT by 1.6% and 3.9%, respectively, to account for lower contributions from multi-tenanted properties.
This comes after the REIT manager on Monday posted a 1Q18 DPU of 1.324 cents, down 11.1% on-year from a DPU of 1.489 previously on lower revenue, which was in line with OCBC estimates at 25.9% of the research house’s initial full-year forecast.
See: Soilbuild Business Space REIT posts 11.1% drop in 1Q DPU to 1.324 cents on lower revenue
In a Wednesday report, OCBC lead analyst Deborah Ong sees SB REIT as being in a stronger position post the disposal of KTL Offshore and given recent updates on its tenant, NK Ingredients.
To recap, the Singapore High Court has granted a temporary moratorium on Soilbuild REIT's proceedings to take possession of an asset following an agreement between Soilbuild REIT and NK Ingredients.
OCBC had originally projected SB REIT would effectively lose about six months' worth of rent for the NK asset in FY18. With the latest development, these assumptions have been updated to expect only about one month of lost income from the NK asset in FY18.
Separately, SB REIT in Feb successfully divested its Tuas property known as KTL Offshore, named after its tenant, to its sponsor SB (Pioneer) Investment for $55 million, which will be used to lower debt.
See: KTL Offshore surrenders estates, interests, rights to landlord
See: Soilbuild REIT upgraded to 'buy' by OCBC after overhang on NK Ingredients lifted
“We see the REIT as being in a stronger position post the KTL Offshore disposal as well as the latest update on the NK Ingredients issue. Recall that the REIT manager confirmed – at the end of March – the receipt of the amounts billed to NK Ingredients between 11 Jan 2018 to 26 Mar 2018 as well as the receipt of a top up of security deposit,” elaborates Ong.
While portfolio occupancy fell for both the West Park BizCentral and Eightrium properties over 1Q18, the analyst expects tenant retention to improve for the former, although the latter is likely to be hindered until its asset enhancement initiatives (AEIs) complete in late May or early June.
Despite the manager’s recent updates of a terminated lease by Tellus Marine and having taken possession of 39 Senoko Way, Ong says she expects no change to the net property income (NPI) contribution from the Senoko Way asset in FY18 given the $1.2 million remaining on its security deposit, which equates to about 11 months of rent.
“We continue to expect the operating environment in the industrial space to remain challenging for much of this year. Yet, while bearing in mind this backdrop, we see upside to our fair value as of 17 Apr’s close [at 66 cents per unit],” says Ong.
In a separate report on Tuesday, Jefferies analyst Krishna Guha says that while yield spreads remain attractive for SB REIT at about 5%, the REIT has recently expanded its investment mandate.
This has led him to believe the credit risks of a few tenants are likely to pose challenges even as tapering supply and stabilising oil prices may offer tailwinds for the REIT.
“Portfolio reconstitution and proactive lease management would likely help. We would like to see signs of improving portfolio occupancy and/or better entry yields,” notes Guha.
As at 11.22am, units in SB REIT are trading flat at 66 cents giving a 7.7% FY18 yield based on OCBC estimates, or 7.4% FY18 yield and 1.05 times book, according to Jefferies’ estimates.
