Sabana Shari'ah Compliant REIT - DBS Research 2020-01-29: Headwinds Persist


Sabana Shari'ah Compliant REIT - Headwinds Persist

  • We think Sabana REIT's share price will be weighed down by concerns over its prospects as it continues to scout for new tenants to fill the vacant space at 10 Changi South Street 2 and 3A Joo Koon Crescent. The upcoming lease expiry amounting to c.42% of net leaseable area (NLA) in 2020 remains a concern and any clarity would help to reassure investors.
  • Maintain HOLD given its lower than peer FY20-21F yield of c.5.8-6.2%.

Revenue and NPI in line with expectations

  • Sabana REIT (SGX:M1GU)'s FY19 gross revenue and NPI were down 5.7% and 2.2% y-o-y to S$76.3m and S$51.6m respectively.
  • The drop was driven by a lack of contribution from 9 Tai Seng Drive (which was divested in 1Q19) and expiry of master lease at 3A Joo Koon Circle in 4Q19.
  • This translated to a DPU of 2.92 Scts, a decline of 8.2% y-o-y, caused by a weaker operating performance.
  • Moving forward, revenue and NPI may decline further owing to possible negative rental reversions in properties outside the central region amid the flattish industrial real estate environment.
  • We have revised revenue and NPI projections down to account for the expiry of the 3A Joo Koon Circle master lease and the ongoing search for tenants for 10 Changi South Street 2.

Operating metrics softened

  • Portfolio occupancy decreased to 75.4% in 4Q19 from 80.6% in 3Q19 led by the expiry of 3A Joo Koon Circle’s master lease.
  • Weighted average portfolio lease term to expiry remained stable at 2.8 years.
  • Approximately 42.4% of leases by NLA will expire in 2020, up from 3Q19’s figure of 39.7%.
  • We note that Sabana REIT is in discussions with potential tenants for 10 Changi South Street 2 which is currently undergoing refurbishment works.
  • Advanced negotiations are also ongoing for a new master tenant at 3A Joo Koon Circle for slightly more than half of the space at the premises.
  • Leasing demand for 151 Lorong Chuan remains strong with most tenants renewing their leases despite the ongoing AEI.

Lower gearing

  • Gearing decreased to 31.1%, from 36.8% a year ago, while weighted average debt maturity improved to 2.3 years (2018: 1.3 years) after Sabana REIT successfully refinanced borrowings in Nov 2019.
  • In future, we believe gearing might increase as Sabana REIT refurbishes its properties and embarks on the second phase of the 151 Lorong Chuan AEI.

Changes in Board of Directors

  • Ms Ng Shin Ein has rejoined Sabana REIT and will Chair the Nominating and Remuneration Committee.
  • Ms Ng was a former non-executive director of Sabana REIT who resigned in 2017.
  • Her return is positive for Sabana REIT as it signals a possible resolution of earlier challenges.

Weak industrial real estate trend

Derek TAN DBS Group Research | Singapore Research Team DBS Research | 2020-01-29
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.480 SAME 0.480