Sabana Shari'ah Compliant REIT - Phillip Securities 2021-04-19: Back To Basics


Sabana Shari'ah Compliant REIT - Back To Basics

  • One of the largest Shari'ah-compliant industrial REITs in the world with AUM of S$840m, Sabana REIT has 18 industrial properties located in Singapore.
  • After abortion of M&A with ESR-REIT, Sabana REIT will continue to divest non-performing assets and rejuvenate selected assets.
  • Ongoing AEI like rejuvenation of flagship New Tech Park (NTP) expected to improve portfolio valuation. NTP+ Mall set to open in 2Q21.

Sabana REIT - Background

  • Listed on the mainboard of the SGX in 2010, Sabana Shari'ah Compliant REIT (SGX:M1GU) is one of the largest listed Shari'ah-compliant industrial REITs in the world with an asset size of S$840m. Sabana REIT has 18 industrial properties in Singapore, situated close to expressways and public transportation. These are classified into four property segments: high-tech industrial, chemical warehouse and logistics, warehouse and logistics and general industrial. Sabana REIT's portfolio WALE is 3.1 years.

Sabana REIT's Sponsor

  • ESR Cayman Limited (1821 HK) is the largest unitholder of Sabana REIT. It is the largest APAC-focused logistics real-estate platform by gross floor area (GFA), by value of the assets owned directly and by the funds and investment vehicles it manages. ESR Cayman holds an aggregate interest of 19.8% of Sabana REIT’s Units. It also owns 7.8% of ESR-REIT.

Sabana REIT's Assets

  • Sabana REIT has 18 industrial buildings in Singapore. These are assets within strategic economic growth areas such as the port, airport and central locations to capture a diverse corporate tenant mix. Almost 50% of its properties are within a 15-minute walk to MRT stations.
  • Sabana REIT's portfolio is divided into four categories: high-tech industrial, chemical warehouse & logistics, warehouse & logistics, and general industrial. Portfolio occupancy was 76.5% as at end-2020.

Back on track with Refreshed Strategy.

  • A proposed M&A with ESR-REIT (SGX:J91U) in July 2020 fell through as Sabana REITT’s unitholders deemed the valuation of Sabana REIT inadequate. While the deal could have offered immediate DPU accretion of 12.9% on a 1H20 annualised adjusted basis, it was offered at a gross exchange ratio of 0.94x. This implied a scheme consideration of S$0.377 or 26% discount to Sabana REIT’s NAV, significantly below its current P/B average of 1.3x.
  • Moving forward, Sabana REIT intends to continue divesting non-performing assets and rejuvenating selected properties, in keeping with its Refreshed Strategy conceptualised in 2018. It aims to stabilise its portfolio by improving occupancy before making potential acquisitions in Singapore or abroad.

High retention rates for existing leases.

  • In FY20, Sabana REIT secured 68 new and renewed leases, for 1.3m sq ft of space. This was close to a third of its portfolio GFA. Retention rates for expiring leases were also high, averaging 73.6%. Renewal leases contributed 58.4%. Relocations within its portfolio contributed another 15.2%. In FY21 and FY22, 21.6% and 19.8% of its leases will be due for expiry.
  • Sabana REIT intends to engage existing tenants while keeping a lookout for prospective tenants in growing industry sectors.

Onboarding expansionary tenants for greater portfolio resilience.

  • Singapore’s electronics PMI expanded in March 2021, for the eighth straight month. According to Fitch Solutions, Singapore’s healthcare market is expected to grow at a 10-year CAGR of 8.7% to S$68.7bn by 2029. This would be underpinned by the country’s ageing population and earlier diagnosis, close monitoring and follow-up of chronic medical conditions.
  • Focusing on expansionary trade sectors such as electronics and biomedical, Sabana REIT onboarded a US electronics company as a new anchor tenant at 23SNA5 in FY20. It also secured new life-science and healthcare tenants and converted 3A Joo Koon Circle into a healthcare cluster. This tenancy shift towards growing sectors should strengthen its portfolio resilience.

High rental collection of over 95%, recovery in occupancy expected from master-lease conversion.

  • Notwithstanding COVID-19, Sabana REIT’s rent collectability was more than 95% in FY20. Rental reversion was also positive at 0.9%. Portfolio occupancy has been in the mid-70s and 80s in the past two years.
  • Occupancy improved from 75.4% in FY19 to 80.2% in FY20. However, after a master lease at 10 Changi South Street 2 was pre-terminated and another master lease at 3A Joo Koon Circle expired in FY19, portfolio occupancy dipped 3.7% q-o-q in 4Q20 to 76.5% in 1Q21. This was due to the expiry of a master lease at 51 Penjuru Road, which has been replaced by a multi-tenancy of 73.1%, as well as the expiry of a master lease for 30/32TA8.
  • Sabana REIT is expecting to take six months to fill the vacancies. Once leased, portfolio occupancy should return above 80%.

Value of flagship New Tech Park (NTP) yet to be unlocked.

  • AEI is underway for 43,000 sq ft of GFA at New Tech Park (NTP). NTP comprises 5% of retail space, dubbed NTP+ Mall, and 95% of business-park space. At 40% of its portfolio by value, NTP still has GFA of 200,000 sq ft that is under-utilised.
  • At the moment, the property serves more than 30 corporate tenants. They include MNCs like Lenovo, Epsilon, ASML, Qala, Nickelodeon and America II. About 70% of these MNCs use the premises for their regional and global headquarters. As Sabana REIT continues to unlock value in this property, NTP has the potential to anchor Sabana REIT’s portfolio.

NTP+ Mall to contribute from 2Q21.

  • NTP+ Mall received its Temporary Occupation Permit on 10 March 2021. This is a two-storey lifestyle mall, comprising 25 retail and F&B units on the ground floor and a food court on the second level. Located opposite the Lorong Chuan MRT station, the mall is expected to serve NTP’s office population and nearby residential developments and schools. It is set to open in 2Q21. Occupancy at NTP+ was 83.4% as at 10 March 2021.
  • NTP’s rejuvenation is expected to enhance its attractiveness as an employment-cum-lifestyle hub for the surrounding affluent/mid-income residential and educational catchment. It should also improve occupancy and rental rates at its business park.


Upcoming industrial supply to weigh on rent growth.

  • As the economy recovers in 2021, demand for industrial space is expected to increase. However, rent growth could be tempered by oversupply. Due to construction delays during COVID-19, about 0.5m sqm of industrial supply that was due to come through in FY20 has been pushed back to FY21. This will result in new supply of 2.7m sqm in 2021, which is 4x the average annual demand of 0.7m sqm.
  • According to Ascendas REIT (SGX:A17U), upcoming business parks and high-tech industrial buildings have the highest pre-commitments of 63% and 74% respectively. The light industrial as well as logistics and distribution sectors could face rent pressure, given that pre-commitments are low at 17% and 27% respectively. As such, prices and rentals may just be stable in FY21.

Uneven COVID-19 recovery.

  • Business sentiment plunged to its lowest level in September 2020 owing to COVID-19. According to the Singapore Business Federation, two thirds of the surveyed businesses in 2020 were affected by COVID-19. The hardest-hit sectors were Construction & Civil Engineering and Retail, Real Estate and Hotels, Restaurants & Accommodation. Sectors reporting positive or no impact from the pandemic were Logistics & Transportation and IT & Professional Services. Barring another wave, we are looking at a gradual but uneven recovery across the trade sectors.

Limited growth opportunities.

  • Being one of the smallest industrial REITs in Singapore, Sabana REIT suffers from low trading liquidity. Following the abortion of its proposed M&A with ESR-REIT, ESR-REIT is restricted from proposing another offer within the next 12 months.
  • As of FY20, Sabana REIT’s 33.5% gearing provided debt headroom for S$150m before the 50% regulatory limit. As sponsor ESR can choose to divest its properties to competitor ESR-REIT, Sabana REIT is more likely to turn to third-party acquisitions.

More on Sabana REIT (SGX:M1GU)

Tan Jie Hui Phillip Securities Research | https://www.stocksbnb.com/ 2021-04-19
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