• NK Ingredients issue continues…
• But there are back-up options for SBREIT
• Trading at 7.9% FY19F yield as at 30 May

Moratorium Extended to 22 Jul 2019

Recall that tenant NK Ingredients is in default under the lease agreement with Soilbuild REIT. The tenant is in the midst of restructuring and was previously granted moratorium by the Singapore High Court pending its proposal of a Scheme of Arrangement to its creditors, conditional on it paying the rent for Apr and May 2019 to Soilbuild REIT. The rent for Apr and May has been paid.

Now, after a subsequent application by NK Ingredients, the moratorium has been extended for a period of eight weeks expiring 22 Jul 2019, subject to NK Ingredients paying the rent for Jun 2019 and Jul 2019 on the 1st day of the respective months. Should NK Ingredients default in payment of the rent on these dates, the moratorium shall lapse.

What Would Happen If NK Ingredients Vacates the Asset?

The property that NK Ingredients occupies consists of seven blocks of office, laboratory, warehouse and production facilities and associated structures. According to the annual report, the asset holds a prominent frontage at the intersection of Gul Lane, Pioneer Sector 1 and Pioneer Road and is accessible to the AYE and PIE.

The asset is currently being used as a fully-automated lanolin, lanolin derivative and cholesterol production facility and we understand that the management has looked for potential back-up tenants including those from the same industry. We believe that alternatively, the management could choose to market the asset for sale or even potentially redevelop it to other specifications.

A Look at Our Assumptions

In FY18, NK Ingredients contributed 7% to Soilbuild REIT’s NPI. We note that the amount currently owed to Soilbuild REIT is ~S$2.3m, slightly less than the ~S$2.6m security deposit held by Soilbuild REIT. The excess of the security deposit over NK Ingredients’ arrears is roughly equivalent to half a month’s worth of rent.

We currently assume that NK Ingredients makes the rental payments necessary for Jun and Jul but that no moratorium extension is granted subsequently. We then assume that the property is subsequently vacated and a replacement for the anchor tenant is found three months later. As at 30 May’s close, Soilbuild REIT is trading at 7.9% FY19F dividend yield.

According to Bloomberg consensus, Soilbuild REIT is trading slightly above its 10Y average in terms of blended forward dividend yield. Valuations are undemanding as we note that other REITs are trading at relatively tight yields on a historical basis in comparison. However, at this point, we are still looking for a clearer positive catalyst for the stock amidst an uncertain macro environment. As such, we maintain HOLD with an unchanged fair value of S$0.62.

Source: OCBC Research - 31 May 2019