Highlights from Sabana Shari’ah REIT’s Latest Second Quarter Results

Sabana Shari’ah REIT (SGX: M1GU), which is the world’s first Shari’ah compliant real estate investment trust, announced its 2nd quarter results yesterday.  The REIT saw its distributions dip due to higher costs and an enlarged unit-holder base with 2.7 million new units being issued during the quarter.

The REIT currently has 22 properties (with a total gross floor area of 4.5 million sq. ft.) in its portfolio. These properties, which are entirely located in Singapore, generally serve one of four different purposes: high-tech industrial, chemical warehouse and logistics, warehouse and logistics, and general-industrial.

Financial performance

In the quarter, the REIT’s gross revenue increased 17.6% year-on-year to S$25.4 million. However, with property expenses surging more than five-fold to S$7 million, the REIT’s net property income fell 9.3% from S$20.2 million to S$18.4 million. Property expenses include service, repairs, maintenance, and insurances; property and lease management fees; marketing and lease administration expenses; and an assortment of property taxes, land rents, and utility bills.

With a drop in net property income, the REIT’s distributable income also fell to S$13 million, down 16.6% year-on-year. Sabana REIT’s distribution per unit (DPU) declined even more – a 22.5% drop to 1.86 cents – due to the new units issued as mentioned earlier.

Financial position

When it comes to REITs, investors should keep an eye on changes in their balance sheets due to their highly-leveraged capital structures. As we turn to Sabana REIT, ratings agency Standard & Poor’s had recently  affirmed the REIT’s credit rating of ‘BBB-‘, which is still considered an investment grade corporate credit rating.

With a portfolio size of S$1.2 billion and total borrowings of S$455.8 million, its aggregate leverage is measured to be around 37%. This compares with the corresponding figures of 34% in Mapletree Industrial Trust (SGX: ME8U) and 31.7% in AIMS AMP Capital Industrial REIT  (SGX: O5RU). The two REITs also hold mainly industrial real estate in Singapore, much like Sabana REIT.

Besides having higher leverage than some of its peers, Sabana REIT might also face the risk of having to deal with higher interest expenses. Given the short average tenor of Sabana REIT’s borrowings at 2.5 years, the REIT might have to refinance its borrowings at higher interest rates should the interest rate environment rise in the next few years.

Outlook & valuation

With regards to the outlook for Sabana REIT, Mr. Xayaraj, chief executive of the REIT’s manager, has this to say:

“During the quarter, our team successfully secured six new leases and 12 lease renewals. Portfolio occupancy remains largely unchanged at 90.8% in [the second quarter of 2014] as compared to 90.6% in [the first quarter of the year].

Looking ahead, the market conditions are expected to remain challenging.

We will continue to intensify our marketing and leasing efforts to improve our portfolio occupancy. We will also continue to make selective acquisitive acquisitions. In addition, we will look for opportunities to recycle our capital by divesting underperforming assets.”

Based on its last traded price of S$1.045, Sabana REIT is valued at 0.98 times its book value of S$1.07. With an annualized DPU of 7.46 cents, the REIT has a distribution yield of 7.14%.

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