Sabana Shari'ah Compliant REIT - UOB Kay Hian 2015-11-24: Jury Still Out On Expiring Leases

Sabana Shari'ah Compliant REIT - UOB Kay Hian 2015-11-24: Jury Still Out On Expiring Leases SABANA SHARI'AH COMPLIANT REIT M1GU.SI 

Sabana Shari'ah Compliant REIT (SSREIT SP) - Jury Still Out On Expiring Leases 

  • The bulk of Sabana’s expiring master leases will be due for renewal in two days. 
  • With no news forthcoming as yet, buying opportunity arises from the underwhelming share price performance. 
  • Our burndown scenario of halving occupancy and slashing 30% in rentals for the affected master leases still implies a healthy 7% yield. 
  • Maintain BUY with a DDM-based target of S$0.92. 


 Moment of truth beckons in two days. 

  • Seven of Sabana Shari'ah Compliant REIT’s (Sabana) nine expiring master leases are due for renewal come 26 November. Ahead of a planned news release on the same day, management remained non-committal on the conclusion of the expiring master leases. 
  • The lack of forthcoming news likely resulted in the sharp 22.4% decline in share price ytd. However, we reckon investors’ wariness over efforts to renew the company’s expiring seven master leases may be overdone, presenting opportunity as negatives are factored in. 


 Negatives priced in. 

  • Our burndown scenario assumes occupancies of 50% for the expiring master leases with a 30% fall in rents, still implying a healthy 7% yield. This excludes 23 Serangoon North Ave (completed conversion to multi-tenancy on 1 October) and 3 Kallang Way (recent divestment announced). 
  • The slight retracement after the REIT’s share price hit an all-time low earlier this month (-24.5% ytd) still represents a 22.4% decline in performance ytd. 
  • The company was similarly plagued by lease renewals in May 13, which saw its share price beaten down 21% in the span of a month, before seeing an uplift of about 9% in Jul 13. 

 Recent divestment of an expiring master lease property. 

  • The REIT manager recently announced the proposed divestment of 3 Kallang Way 2A, Fong Tat Building, to its existing master tenant, Fong Tat Motor for a sale consideration of S$16.6m. 
  • The asset was originally one of eight master lease properties due to expire on 26 November and this would ameliorate the lease expiry overhang. Although the divestment was carried out at a 2.4% premium to Oct 15's valuation (gain of S$0.4m), we note that the asset was valued at S$16.8m in Dec 14, representing a revaluation loss of 3.6%. 
  • Factoring in the related costs and expenses (inclusive of divestment fee of S$83,000), we reckon the divestment gains to be paid out to unitholders could likely be minimal. 

 Recycling of under-performing assets and acquisition-led growth still underpins management’s strategy. 

  • Apart from the company’s drive to renew master leases, management has capital recycling in its sights, as the divestment of under-performing assets and pursuit of yield-accretive acquisitions remain at the core of its plans, as mentioned above. 
  • Debt headroom of $45.8m (assuming comfortable 40% gearing limit) would support domestic acquisitions, likely funded by a combination of debt and equity. 
  • Management re-iterated their reluctance to stretch their gearing levels, preferring to remain at a more prudent 40%. 

 Future endeavours to smoothen lease expiry profile. 

  • Management continued to highlight diligence in monitoring expiring leases. 
  • Going forward, the company will prevent lease expiry from exceeding 30-35% in any given year. 

 Possible outward expansion on gloomy domestic outlook. 

  • Management continues to express reservations on Singapore’s industrial outlook, and has highlighted the possibility of venturing abroad. Australia was flagged as a market Sabana could be interested in, pending careful evaluation of cap rates. However, warehouse acquisitions in the domestic market have not been ruled out, as management has stated cap rates above 7% would look attractive to them. 


 Key risks include: 

  1.  Inability to renew the seven master leases due Nov 15. 
  2.  Inability to ensure master tenants occupy 70% of GFA. 


  • Maintain BUY with a target price of S$0.92 based on DDM (required rate of return: 8.1%, terminal growth: 1.3%). 


  • Renewal of master leases.

Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | 2015-11-24
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