SINGAPORE (Oct 21): Analysts are remaining lukewarm on Soilbuild Business Space REIT, after the business park and industrial property trust saw its 3Q19 results come in below expectations.

The manager of Soilbuild REIT on Oct 16 announced a distribution per unit (DPU) 0.918 cents for the 3Q ended September, some 26.3% lower than DPU of 1.245 cents a year ago.

The decline, however, was mainly attributable to an enlarged unit base following its recent preferential offering and the cessation of revenue recognition from NK Ingredients.

Soilbuild REIT in September issued 192.1 million new units at an issue price of 53 cents each in a preferential offering, to raise gross proceeds of approximately $101.8 million.

The proceeds from the preferential offering will be used to help fund Soilbuild REIT’s proposed A$134.2 million ($125.4 million) acquisition of 25 Grenfell Street, a multi-tenanted, freehold Grade A office in Adelaide, Australia.

Chu Peng, an analyst at OCBC Investment Research, notes that Soilbuild REIT’s 3Q19 DPU would have fallen by a more modest 12.9% y-o-y after stripping off the impact of the preferential offering.

However, she notes that the acquisition is likely to be DPU dilutive.

“A combination of 74% debt and 26% equity will likely to be used to finance for 25 Grenfell Street. This is on the assumption that SBR draws down an existing loan facility of A$37.13 million in addition to the $101.8 million raised earlier,” Chu says. “In such a scenario, DPU will likely see dilution by -3.3%, while gearing will be reduced by 110 bps from 39.4% to 38.3%.”

OCBC is keeping its “hold” call on Soilbuild REIT with a fair value estimate of 52 cents.

Meanwhile, Soilbuild REIT is deferring payments from NK Ingredients as the tenant is currently placed under judicial management.

The way KGI Securities Research analyst Geraldine Wong sees it, there are two likely scenarios for the NKI property.

“NKI could either continue operations as a going concern via judicial management and remain a tenant of Soilbuild REIT, or discontinue operations, whereby Soilbuild REIT will take repossession of the asset and conduct asset redevelopment to increase gross plot ratio from 0.55 to 1.0,” Wong says.

Headwinds persist

Notwithstanding the impact of the preferential offering and the issue with NKI, Soilbuild REIT’s 3Q19 net property income (NPI) rose 4.5% to $17.0 million, as gross revenue grew 7.0% to $21.2 million.

The better performance was mainly due to contribution from two Australia properties acquired in October 2018, and conversion of Solaris into a multi-tenanted property in August 2018.

However, the analysts believe Soilbuild REIT’s rental reversions will likely remain soft for the coming few quarters.

“Industrial stock for the coming four years will peak in 2020 at 1.75 million sqm, with concentration within the business park (7.7% of existing supply) and multi-user (7.2% of existing supply) segments,” says KGI’s Wong.

On the other hand, Wong also notes that JTC rental statistics showed signs of bottoming industrial rents in 2Q19.

KGI is maintaining its “neutral” rating on Soilbuild REIT with a target price of 58 cents.

“We continue to wait for an update on tenant NKI and anticipate soft rental reversions for the coming quarters,” says Wong.

As at 12.45pm, units in Soilbuild REIT are trading half a cent lower, or down 1.0%, at 52 cents.

According to KGI, it is currently trading near its 5-year historical low P/B ratio of 0.83 times, and offers the highest consensus forward dividend yield of 9.5% among the industrial subsector, which has an average forward dividend yield of 6.4%.