SINGAPORE (Oct 16): Phillip Capital is downgrading Soilbuild Business Space REIT to “reduce” on worsening arrears, while raising its discount rate to 7.9% from 6.9% on the basis of higher uncertainty in future cash flows.
At the same time, the research house has lowered its target price on the REIT to 64 cents from 73 cents previously, which implies 0.9 times FY17 NAV.
This comes as Soilbuild REIT faces potential overhang from its tenant, NK Ingredients, while around 148,500 sq ft of 72 Loyang Way which remains vacant may negatively impact year-end valuations.
The REIT’s third master leasee, KTL Offshore, is also now approximately seven months in arrears. The independent auditor of its parent company, KTL Global, has already flagged doubts on the group's ability to continue as a going concern.
Soilbuild REIT has nonetheless seen a q-o-q improvement in portfolio occupancy to 94.1% from 92.6% in 3Q, driven by higher occupancy from its properties WestPark BizCentral and 72 Loyang Way.
See: Soilbuild REIT announces 1.8% lower 3Q DPU of 1.374 cents
In a Monday report, Phillip Capital analyst Richard Leow says he will trim his forecast for Soilbuild REIT should NK Ingredients’ lease be terminated early, while also noting that 72 Loyang Way could be facing competing supply from a neighbouring property at Loyang Crescent.
With KTL Offshore joining the REIT’s list of tenants with receivables collection issues, he highlights that almost 12% of its net property income (NPI) is now exposed to tenant default.
“The outlook is negative due to multiple tenant defaults in the portfolio – Technics Offshore Engineering, NK Ingredients and KTL Offshore. Rental revisions during the quarter were –4.0% compared to –9.8% in 2Q17,” says Leow.
“The manager expects negative reversions to persist into 2018. We believe industrial rent to bottom in 2018, on tapering new supply,” he adds.
Meanwhile, OCBC Investment Research has maintained its “hold” call on Soilbuild REIT with an unchanged fair value of 66 cents after minor adjustments, while opting to keep its assumptions for NK Ingredients for now.
“Pending further updates, we keep our assumption of a 65% chance that NK 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,” explains lead analyst Deborah Ong in a separate report.
See: Uncertainty for Soilbuild REIT as master lease tenant in arrears
As for the KTL lease, Ong assumes no pre-termination as she estimates that the first insurance guarantee, which has already been topped up, will cover KTL’s rent fully until, and including, April 2018.
“FY18 continues to look to be a challenging year [for Soilbuild REIT], with the management still guiding for negative rental reversions of a similar magnitude to that seen YTD. Nonetheless, it appears that the rental reversions have been getting less negative,” says the analyst.
DBS Vickers Securities is likewise maintaining its “hold” recommendation on the REIT, but has cut its target price to 62 cents from 73 cents previously, after factoring in two tenant defaults and the delayed backfill of 72 Loyang Way.
The latest price target represents a 12.7% downside to its last-traded price of 70.5 cents, with a 6.6% yield.
DBS’ research team has also reduced its FY18 distribution per unit (DPU) projection to 4.66 cents from 5.27 cents previously, and expect Soilbuild REIT’s DPUs to remain under pressure in the near-term.
While it believes signs of a sustained recovery – as marked by a high correlation of 0.93 between occupancy rates and share price – would restore investors’ confidence in the trust’s DPU outlook, the research house doubts such a recovery would take place in FY18 given its recent tenant defaults.
“A recovery in DPUs will likely come only from 2H18, upon the expiry of the master lease at Solaris, a business park asset which is projected to continue to perform strongly,” says DBS.
“We expect additional revaluation losses of up to 10% to occur in FY17. Gearing could inch up by another c.100bps, while still within the comfortable level, limits funding options for acquisitions,” it adds.
As at 3:21pm, units of Soilbuild REIT are trading flat at 70 cents.
