• Portfolio occupancy fell QoQ and YoY
• Negative rental reversion for FY19
• Repossession of 2 Pioneer Sector

4QFY19 Results Missed Expectations

Soilbuild Business Space REIT's (SBREIT) 4QFY19 results came in below ours and the street’s expectations. Gross revenue and net property income fell 11.5% and 14.8% YoY respectively, due to lower contribution from 72 Loyang Way, 2 Pioneer Sector 1 and Solaris, partly offset by maiden revenue contribution from 25 Grenfell Street of S$1.6 million.

4QFY19 DPU fell 36.3% YoY to 0.925 S cents, following the preferential offering to partly fund the acquisition of 25 Grenfell Street, Adelaide, which was completed in November 2019. FY19 DPU was 4.22 S cents, down 20.1% YoY. As such, FY19 DPU formed 97% of our initial full-year forecast and 96% of the street’s consensus, which we consider to be below expectations.

NKI Dragged Down Portfolio Occupancy

Portfolio occupancy fell 5.5 ppt YoY from 89.5% in 4QFY18 and 4.4 ppt QoQ from 88.4% in 3QFY19 to 84.0% in 4QFY19. The drag came from the pretermination of the master lease agreement with NKI. Stripping off the impact of NKI, portfolio occupancy in 4QFY19 would be 88.8%. Rental reversion failed to continue its positive trend from last quarter and turned negative at -11.6%, with +5.6% for renewal leases (driven by Business Park) and -14.1% for new leases (mainly from Industrials). For FY19, SBREIT recorded negative rental reversion of 2.5%.

Update on NKI

SBREIT has taken possession of the property at 2 Pioneer Sector after NKI defaulted and failed to comply with its rental payment obligations under the master lease agreement. SBREIT is exploring a potential redevelopment option with capex of ~S$50-60m to maximise NKI’s plot ratio from 0.55x to 1x. The net sale proceeds of S$33.08m from the divestment of 72 Loyang Way could be used to partly finance the AEI, with the remaining costs to be funded by debt. The divestment which was supposed to be completed by 4QFY19 was further delayed to 1QFY20 due to longer approval process.

In view of further extension, the sale consideration has been revised from S$34.08m to S$33.08m. After factoring in the absence of income from 2 Pioneer Sector, we maintain HOLD on SBREIT and fair value estimate of S$0.52.

Source: OCBC Research - 28 Jan 2020