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


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’s investments beginning to bear fruit

  • 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%.

Sabana REIT's 2H21 outlook appears positive

  • 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.

Conversion to unsecured borrowings to raise debt headroom

  • 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.

Upcoming supply of multiple-user factories may pose risks but COVID-19 construction delays could deliver boost.

  • 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.

Maintain BUY with higher DCF-based target price of S$0.49.

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