• DPU fell 26.3% YoY
• Overall rental reversion turned positive
• Potential redevelopment of NKI

Soft Set of Results

Soilbuild Business Space REIT's (SBREIT) 3QFY19 gross revenue increased by 7.0% YoY to S$21.2m, mainly due to the conversion of Solaris into a multitenanted property and the contribution from two Australia properties which were acquired in 2018. The increase was partially offset by lower contribution from NK Ingredients (-S$0.8m), Eightrium (-S$0.3m) and 39 Senoko Way (-S$0.3m).

Net property income grew by 4.5% YoY to S$17.0m on the back of higher revenue, partially offset by higher property operating expenses (+18.6% YoY). 3QFY19 DPU fell 26.3% YoY from 1.245 S cents to 0.918 S cents, following the preferential offering and the cessation of revenue recognition from NK Ingredients. 3QFY19 DPU came up to 20.0% of our full-year forecast with 9MFY19 DPU making up 71.6% of our full-year estimate, which we consider to be below our expectations. Stripping off the impact of the preferential offering, 3QFY19 DPU would have dropped 12.9% YoY.

Portfolio Occupancy Remained Stable

Portfolio occupancy improved 0.8 percentage points YoY to 88.4% but fell marginally QoQ (-0.2 percentage points). Rental reversion turned positive at +1.0%, with +8.5% for renewal leases (driven by Business Park, mainly from Solaris) but -9.3% for new leases (mainly from Industrials). In 4QFY19 and FY20, 1.2% and 17.6% of Soilbuild REIT’s portfolio NLA is up for renewal, respectively. Given the cautious environment and strong pipeline supply across the various industrial space, we expect rental reversions to remain challenging in 4Q19 and 2020.

Potential AEI for NK Ingredients Building

Regarding NK Ingredients (NKI), the Manager has indicated that it was prepared to defer payment of NKI’s rent for two months from 1 September to 31 October 2019 to assist the judicial manager’s management of NKI’s cash flow. While waiting for more clarity from the judicial manager, SBREIT is exploring a potential redevelopment option with capex of ~S$55-60m to increase NKI’s plot ratio from 0.55x to 1x.

The net sale proceeds of S$34.08m from the divestment of 72 Loyang Way could be used to partly finance the AEI. Note that the divestment was expected to be completed in 3Q but was delayed to 4Q due to longer approval process.

After adjustments, which include lowering our FY19 and FY20 DPU forecasts by 5.8% and 4.9%, respectively, and paring our terminal growth assumption to 0.5% (previously: 1.25%), our fair value decreases from S$0.58 to S$0.52.

Source: OCBC Research - 18 Oct 2019