SINGAPORE (Nov 10): Phillip Capital remains negative on the outlook of Soilbuild Business Space REIT as it maintains “reduce” on the REIT with a target price of 61 cents, which represents an implied FY17 P/NAV multiple of 0.86 times.

To recap, Soilbuild Business Space REIT is currently in the midst of a rental dispute with master lease tenant NK Ingredients, after it paid the REIT trustee $3.42 million arising from rental arrears but failed to to-up the insurance guarantee due on Oct 16.

In a Thursday report, analyst Richard Leow says it is likely for NK Ingredients’ lease to be terminated early given its inability to furnish an insurance guarantee.

On the belief that the marketing of the REIT’s property at 2 Pioneer Sector 1 is about to start soon, the analyst is expecting property expenses to add to the burden for the duration it remains vacant, and if the property is converted to a multi-tenancy.

Phillip Capital currently assumes for the property to remain vacant for four months after Jan 2018, and believes that property valuation at the end of this year could be negatively impacted as well.  

The research houses also highlights difficulty in back-filling the property at 72 Loyang Way given that it is only 27% occupied as at 3Q. This arises from not only having to secure a tenant specifically from the Offshore Marine sector, but also requiring up to 148,500 sf of space.

Meanwhile, KTL Offshore, which contributed to 5.1% of Soilbuild REIT’s FY16 NPI, is now in arrears. Its parent company, KTL Global Limited was flagged by its independent auditor, doubting the group's ability to continue as a going concern.

“Income visibility from NK Ingredients has been impaired, and we think there is a high possibility that KTL Offshore could be next,” says Leow.

As at 12.57pm, units in Soilbuild REIT are trading 1 cent higher at 66 cents, 15.5 times FY18 earnings.