Sabana Shari'ah Compliant REIT - DBS Research 2021-07-23: Raising Target Price As NTP+ Shines

SABANA SHARI'AH COMPLIANT REIT (SGX:M1GU)

Sabana Shari'ah Compliant REIT - Raising Target Price As NTP+ Shines

Sabana REIT's 1H21 portfolio occupancy soars to 83.4%; highest since 4Q18.
Rental reversion in 1H21 at 11.8%, boosted by completion of AEI and NTP+.
Refinancing of secured borrowings to unsecured basis to boost potential debt headroom.
Maintain BUY with higher target price of S$0.49.

Sabana REIT (SGX:M1GU)'s 1H21 revenue and net property income rose to S$39.1m (+14.1% y-o-y, +4.4% h-o-h) and S$25.7m (+23.2% y-o-y, +8.1% h-o-h), respectively.
The improved performance came on the back of high portfolio occupancies, contributions from the recently completed NTP+, and the low base in 1H20.
Accordingly, 1H21 DPU increased to 1.48 cents (+214.9% y-o-y, -35.4% h-o-h). While DPU declined h-o-h, 2H20 DPU was elevated due to a one-time ~S$3.2m distributable rollover adjustment from tax rulings and the release of ~S$6.1m in distributions that were withheld in 1H20.
Gearing declined 1.0 ppt q-o-q to 34.9% with average all-in financing costs maintained at 3.4%.

Portfolio occupancy rose to 83.4% as at 1H21, the highest level since 4Q18. Portfolio occupancy would have been higher at 86.4% if 1 Tuas Ave 4, which is held for divestment, was excluded.
75.8% of expiring leases in 2021 have been renewed or replaced, with only ~11.5% of lease expiries by gross rental income to be renewed for 2H21.
Completed asset enhancement initiative (AEI) at 151 Lorong Chuan (Occupancy: 82%), 8 Commonwealth Lane (Occupancy: 91%), 23 Serangoon North Ave 5 (Occupancy: 86%), and 10 Changi South Street 2 (Occupancy: 70%) could generate further demand for these assets and upside to DPU.
Compliance with Shari’ah requirements to be removed in Oct 2021, which would provide access to more diversified funding sources and a larger pool of tenants.

Sabana REIT has entered into facility agreements for up to S$225.0m in unsecured loans, which could lead to the conversion of ~70% of borrowings to an unsecured status.
The new loans are expected to extend weighted average term to maturity with the next refinancing pushed to 2024.
The conversion could free up an estimated ~S$700m in investment properties from encumberment and raise Sabana REIT’s debt headroom.
The new borrowings could be used to fund new acquisitions or AEI with studies being conducted for AEIs at 1 Tuas Ave 4, 10 Changi South Street 2, and 151 Lorong Chuan Phase 3.

Demand for MUF space was higher than change in available stock since 3Q20 and this has had a positive effect on occupancy rates. We note that ~545,000 sqm of multiple-user factory (MUF) space is expected to be completed in 2H21, significantly higher than the ~213,000 sqm change in occupied stock in 1H21. However, COVID-19 construction delays, especially given the return to Phase 2 heightened alert, may still deliver a short-term boost in demand for Sabana REIT’s assets in 2H21.

We raise our revenue and DPU estimates to factor in improved occupancies and rental reversions at assets such as 151 Lorong Chuan and 8 Commonwealth Lane. Barring the provision of further rental rebates, we believe Sabana REIT may achieve a DPU of 3.06 cents, representing a current yield of ~7%.
See

Derek TAN DBS Group Research | Woon Bing Yong DBS Research | https://www.dbsvickers.com/ 2021-07-23

SGX Stock Analyst Report BUY MAINTAIN BUY 0.450 SAME 0.450