Soilbuild Business Space REIT: Ceasing coverage January 18, 2018

  • Gross revenue and DPU were in line with our estimates
  • 4Q17 DPU of 1.383 cents to be paid on Feb 28 (4Q16: 1.57 cents)
  • $80.5mn revaluation loss, investment properties value now stand at $1.11bn
  • Ceasing coverage due to reallocation of internal resources

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The positives

  • Occupancy as at end of FY17 remained stable at 92.7%. This was on the back of 920k sq ft of new leases, renewals and forward renewals done during the year, amounting to 24% of the portfolio. Average occupancy across the four quarters was 92.8%; occupancy a year ago at end FY16 was 89.6%.
  • QoQ lower average all-in interest cost from 3.32% p.a. to 3.20% p.a. This was due to refinancing of $185mn bank loan (originally due 2020) to 2022. Nonetheless, interest expense was higher in FY17 compared to FY16, due to higher debt.

The negatives

  • $80.5mn fair value loss to investment properties, resulting in NAV per Unit drop QoQ from $0.71 to $0.64. Revaluation losses were for 72 Loyang Way ($27.0mn), West Park BizCentral ($20.0mn), Eightrium ($13.2mn), NK Ingredients ($8.0mn), Tuas Connection ($4.3 mn) and Bukit Batok Connection ($2.6mn). Portfolio value now stands at $1.11bn, excluding $53mn for KTL Offshore which has been reclassified as property held for sale.
  • Operationally, reversions were negative in 4Q17 and FY17. Renewals in 4Q17 and FY17 were at -14% and -6.3% reversions, respectively. New leases signed in 4Q17 and FY17 were at -18.9% and -15.5% reversions, respectively. New leases showed greater magnitude in negative reversion, as some of the space had been vacant and reversions were computed against historical rent for the specific space.
  • QoQ higher aggregate leverage of 40.6% from 37.9%. Fair value loss on portfolio resulted in a lower asset base used in the computation of aggregate leverage, despite total debt being unchanged.

Outlook

The outlook is negative. The manager expects negative reversions to continue into 1H 2018, stabilising only in 2H 2018. Barring any acquisitions to grow the portfolio, we expect FY18e gross revenue to be lower YoY, due to divestment of KTL Offshore. Current 40.6% gearing inhibits acquisitions, as it is close to the statutory limit of 45%. Divestment proceeds from KTL Offshore is likely to be used to pare down debt. There is an overhang arising from uncertainties on NK Ingredients. Despite NK Ingredients continuing to pose a default risk, our view is that retaining the tenant is the lesser of two evils; the other being to remove the tenant now and suffer an indeterminate period of vacancy.

Ceasing coverage

Our most recent rating from Nov 9, 2017 report, was “Reduce” with target price of $0.61. We are ceasing coverage on this counter due to reallocation of internal resources.

 

Ongoing developments

  • Expansion of investment mandate to include Australia. The manager announced in November 2017 that it is actively exploring investment opportunities in Australia, where land tenures are longer compared to Singapore. This should also enhance portfolio diversification in terms of tenant base. The manager commented during the results briefing that it is actively looking for acquisitions in Australia, but there is nothing concrete at the moment.
  • Proposed divestment of KTL Offshore. This was announced in December 2017 and would transfer away tenant default risk and lower aggregate leverage. The tenant at 61 & 71 Tuas Bay Drive, KTL Offshore Pte Ltd, is in default. The property is commonly known as KTL Offshore and it contributed 5.3% of FY17 portfolio NPI. The property was acquired in October 2014 for $55.7mn, has been valued at $53.0mn as at end FY17, and proposed divestment for $55mn. The Purchaser is a wholly-owned subsidiary of Soilbuild Group Holdings and an Extraordinary General Meeting will be called to seek unitholders’ approval. Divestment expected to be completed in 1Q18.
  • Moratorium on proceedings against NK Ingredients. The manager had sought to take possession of the property at 2 Pioneer Sector 1. However, the tenant, NK Ingredients Pte Ltd, has applied for a moratorium against proceedings against it. A temporary moratorium has been granted, subject to certain conditions, such as making timely rent payments from here forth and topping up of the security deposit in three tranches. The first default event would be on Jan 31, 2018, when payment of rent for January 2018 is due.

Relative valuation

SBREIT is overvalued relative to the peer average P/NAV multiple, and has a higher yield compared to the peer average. We believe the higher yield compared to peers is a reflection of the risk of the portfolio going forward.

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About the author

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Richard Leow
Investment Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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