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It’s Challenging Times Now for Sabana Shari’ah Compliant REIT

Sabana Shari’ah Compliant Industrial REIT (SGX: M1GU) is – as its name partially suggests – the largest Shari’ah Compliant REIT listed in Singapore. It currently has 22 properties under its portfolio. With a focus on industrial assets in Singapore, most of its properties end up serving the high-tech industrial and logistics sectors.

Source: Company Presentation

The trust has been suffering declining occupancy rates for some time now. To counter this trend, the trust had converted 4 master-tenanted properties (i.e. renting out the entire property to one or two organizations who would then turn around and rent out the individual units within the property) into multi-tenanted properties during the last quarter of 2013. However, the REIT’s portfolio occupancy rate continues its downward trend, dropping from 91.2% in the last quarter of 2013 to 90.6% in the latest quarter.

Operating result

The trust ended the first quarter of 2014 with an income available for distribution of S$13 million, some 15.8% lower compared to a year ago. This happened despite Sabana REIT enjoying a 14.2% increase to S$24.6 million in gross revenue for the quarter. As the number of directly managed properties has increased from one in the first quarter of 2013 to six currently, the trust is experiencing a huge increase in operating expenses. An increase in higher interest costs added to Sabana REIT’s woes and helped cause the drop in distributable income.

The quarterly distribution per unit also suffered as a result, dropping 22% from 2.41 cents per unit in the previous year to only 1.88 cents per unit. Based on its share price of S$1.05 currently, its annualised distribution yield now stands at 7.2%.

Turning to the REIT’s balance sheet, its borrowings stood at S$455.8 million, bringing its aggregate leverage to 37%, a slight increase from the ratio of 36.9% in the first quarter of 2013. In any case, the trust might also experience interest rate risk. With its weighted average tenor of debt at only 2.7 years – which is short – the trust might be faced with higher interest expenses if interest rates move up in the shorter term during periods when it has to refinance its debt. And of course, if the REIT can’t grow its revenue at the same time while expenses are increasing, that would likely hurt its distributions to investors.

The manager of the trust expects the property sector to be stable due to the slowing measures implemented by the government. The strategy going forward for Sabana REIT is for the manager to strengthen its marketing efforts in leasing out its properties – investors could look out for increases in the REIT’s portfolio occupancy rate in the future for an indication of management’s marketing-effectiveness. The trust is also open to divesting some properties to reinvest or pare down its debt.

Foolish Summary

It might seem like the industrial-property space in Singapore is facing a tough time. If the economy of Singapore slows down even further, we might see more challenges ahead for Sabana REIT.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.