Soilbuild Business Space REIT: Master leasee NK Ingredients defaults September 19, 2017 2301

  • Letter issued to NK Ingredients, demanding for rent in arrears
  • No impact to FY17e estimates, as the balance of security deposit covers approximately four months of rent
  • The manager estimates that the property contributed 0.315 cents DPU for 1H FY17; NK Ingredients account for almost 7% of FY16 NPI
  • Rating and target price Under Review, pending further announcement in seven days

What is the news?

Soilbuild Business Space REIT (SBREIT) announced that a letter of demand has been issued to NK Ingredients Pte Ltd (NK Ingredients) for rent arrears amounting to S$3.42mn. NK Ingredients is the master leasee at SBREIT’s property at 2 Pioneer Sector 1. The Trustee, holds the security deposit amounting to S$5.11mn. After SBREIT draws down the arrears from the rental deposit, the S$1.69mn balance is equivalent to approximately four months of rent. NK Ingredients has seven days to top up and make whole the security deposit.

How do we view this?

  • Tenant has been in arrears for eight months

We deduce from the rent arrears (S$3.42mn) demanded and the balance security deposit which lasts for four months (S$1.69mn) that NK Ingredients has been in arrears for eight months.

  • Not a systemic default of Marine Offshore, Oil & Gas tenant

NK Ingredients is from the Chemicals sector. NK Ingredients refines wool grease, which is the raw material for all lanolin products. Lanolin is used in cosmetics.

  • No impact to our FY17e forecast

The security deposit is equal to about four months of rent and it will cover for the remainder of FY17e.

  • Material impact to the portfolio, should the Tenant be terminated

On a full year basis, NK Ingredients accounted for 6.8% of portfolio net property income (NPI) and 8.9% of gross rental income (GRI) in FY16. For the most recent 2Q FY17, NK Ingredients contributed 5.9% of portfolio GRI. NK Ingredients is currently the largest master leasee in the portfolio, if Solaris and Bukit Batok Connection were to be excluded. Recall that both Solaris and Bukit Batok Connection are master leased properties, but with underlying end-users.

Rating and target price Under Review, pending further announcement (previously Neutral: S$0.73)

Our estimates from FY18e onwards is dependent on whether NK Ingredients tops up the security deposit within the next seven days. Failure to top up will result in us having to lower our estimates. At this time, we think there is a low probability of NK Ingredients topping up the security deposit.

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About the author

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Richard Leow
Research 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 (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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