SINGAPORE (Apr 22): The manager of Soilbuild Business Space REIT (Soilbuild REIT) declared that its 1Q19 DPU dropped 9.5% to 1.198 cents from 1.324 cents in 1Q18. Income attributable to unitholders fell 8.7% to $12.7 million in 1Q19, from $14.0 million a year ago.

This was mainly due to property operating expenses, finance expenses, other trust expenses and perpetual securities coupons outpacing an increase in revenue.

Revenue was 16.6% up y-o-y at $22.7 million, while net property income increased by 7.7% y-o-y to $18.3 million.

See: Soilbuild REIT posts 9.5% drop in 1Q DPU to 1.198 cents despite higher revenue

Following the results announcement, OCBC Investment Research is keeping its “hold” call on Soilbuild REIT with a target price of 62 cents.

In a Monday report, analyst Deborah Ong views the group’s divestment of 72 Loyang Way as a positive, given that it has been a struggle to find a suitable replacement for the anchor tenant at the property, and the remaining land lease tenure is relatively short at 19 years.

See: Soilbuild REIT disposes 72 Loyang Way asset for $34.1 mil with remaining lease of 19 years

“With the divestment, the weighted average land lease by valuation is expected to improve from 47.4 years (as at 31 Dec 2018) to 48.2 years. Furthermore, the net sale proceeds could be used to reduce the aggregate leverage, thus lowering finance costs,” says Ong.

However, the REIT recorded negative rental reversions of -2.5% and -4.0% for renewals and new leases respectively for 1Q19. Although the negative rental reversions are narrowing, challenges remain at NK Ingredients and Eightrium.

Tenant NK Ingredients is in the midst of restructuring and has applied for a moratorium pending its proposal of a Scheme of Arrangement to its creditors. The amount currently owed to Soilbuild REIT is about $2.3 million, slightly less than the $2.6 million security deposit held by Soilbuild REIT.

Meanwhile, we note that tenant DBS has not renewed their lease at Eightrium, where they take up 30k sqft (about 17% of Eightrium’s NLA but about 0.7% of total portfolio’s NLA).

Meanwhile, tenant DBS has not renewed their lease at Eightrium, where they take up 30k sqft (17% of Eightrium’s NLA but 0.7% of total portfolio’s NLA).

DBS Group Research has followed suit and downgraded its call on Soilbuild REIT to “hold” from “buy” with a lowered target price of 63 cents from 65 cents previously.

In a Monday report, lead analyst Carmen Tay says, “lower projections to reflect expectations of delays to the onset of a sustained DPU recovery for SBREIT. That said, we believe that decent FY19F-20F yields of 7.6-7.8% should continue to hold up the stock for now.”

Tay believes that investors will shift their focus towards asset-specific concerns, particularly for West Park BizCentral and Eightrium, which could see near-term volatility in occupancy levels amid tenant relocations.

“Concerns over the financial strength of Beng Kuang Marine and NK Ingredients, which make up about 8% of top-line, may also cap share price performance over the medium term,” adds Ong.

Units in Soilbuild REIT closed at 62 cents on Monday, or 14.6 times FY19 earnings with a distribution yield of 7.6%.