SINGAPORE (Sept 20): OCBC Investment Research is maintaining its “hold” call on Soilbuild Business Space REIT (Soilbuild REIT) with a marginally lower fair value estimate of 66 cents, from 67 cents previously.
The trustee of Soilbuild REIT has issued a letter of demand to master lease tenant NK Ingredients for arrears amounting to $3.4 million and has called upon an insurance guarantee of $5.1 million. The balance of $1.7 million from the guarantee is equivalent to about four months’ rent.
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.
The REIT manager does not expect that there will be a material financial impact on FY17F DPU given the insurance guarantee. However, it estimates that 1H17 DPU would have been 10.7% lower at 2.64 cents should the lease have been terminated as at Jan 1, 2017.
“We believe there is now greater uncertainty regarding future income streams for the asset in FY18 and beyond,” says lead analyst Deborah Ong in a Wednesday report.
She estimates that there is a 65% chance that the tenant will not be able to repay its arrears within the seven days from the call of the insurance bond, and will consequently have its lease pre-terminated.
“Should the lease with NK be pre-terminated, Soilbuild REIT will need one or multiple new anchor tenants – preferably also within the chemicals industry – to occupy at least 70% of the NLA,” Ong says.
However, if NK does pay its arrears in time, the analyst assumes that it will continue as a master lease tenant till 2028 and beyond.
Nonetheless, Ong still expects the asset to enjoy 100% occupancy in FY20 and beyond in either scenario.
As at 3.35pm, units in Soilbuild REIT are trading half a cent higher at 70.5 cents, implying an estimated FY17F price to earnings (P/E) ratio of 14.0 times with a DPU yield of 8.5%.
