Sabana Shariah Compliant REIT’s Latest Earnings Leaves Investors with Nothing to Cheer About

Sabana Shariah Compliant REIT (SGX: M1GU) had just released its full-year earnings for 2014 yesterday. The REIT is actually the world’s first Shariah compliant real estate investment trust.  As my colleague Chong Ser Jing once explained:

“Shari’ah is the moral code and religious law of the Islamic religion. Sabana REIT’s Shari’ah compliant status would mean that, in addition to abiding to prevailing rules and regulations that governs REITs in Singapore, it would also be managed “in accordance with Shari’ah investment principles and procedures”…

…To the REIT’s manager, being Shari’ah compliant confers advantages to it in terms of financing. Conventional REITs are only open to secular funding, while Sabana REIT can not only tap into that but also into the Islamic finance market, which Standard & Poor’s estimated to be worth around US$1.4 trillion in 2011.”

The REIT focuses on industrial properties scattered around Singapore which are collectively worth around S$1.26 billion as at 31 December 2014.

With these as a backdrop, let’s dive into the REIT’s earnings release.

The financials

Despite seeing gross revenue for the whole of 2014 grow by 12.1% to S$100.3 million from a year ago, the trust’s net property income (NPI) actually declined by 9.2% to S$72.95 million.

The decline was partly due to a huge 200% increase in property expenses for the trust. The higher property expenses were in turn caused by the increase of directly managed multi-tenanted properties from two to seven since 26 November 2013.

Another factor which contributed to the decline in NPI was the jump in lease management fees. Sabana REIT had acquired 15 properties during its listing and the lease management fees for those properties had been waived for a 3-year period; the waiver had ended in the fourth quarter of 2013, leading to lease management fees being charged for the 15 properties in 2014.

Going further down the REIT’s income statement, we’d see that there was a 20.9% increase in annual net finance costs to S$24.5 million for 2014. This, along with the lower NPI, had resulted in a 21% decline in net profit to S$39.1 million for Sabana REIT.

Income available for distribution to Sabana REIT’s unitholders followed suit with a 16.4% drop to S$51.6 million. With a bigger unit-count, Sabana REIT’s distribution per unit (DPU) declined by 21.9% to 7.33 cents compared to a year ago.

The REIT’s financial strength and operational highlights

As at 31 December 2014, the trust’s total borrowings stood at S$486 million, giving rise to a leverage ratio of 38%. Compared to a year ago, when total borrowings and aggregate leverage were at S$456 million and 36.9% respectively, Sabana REIT has seen its balance sheet weaken.

It should also be noted that Sabana REIT’s leverage ratio is higher than the current limit of 35% for a REIT without a credit rating. That said, Sabana REIT has a credit rating from Standard & Poor’s (a BBB rating), and that allows the REIT to increase its leverage up to 60%.

Sabana REIT’s all-in average financing cost at the end of 2014 was 4.1%, unchanged from a year ago. The weighted average tenor of its borrowings though, has improved from 2.3 years at the end of 2013 to 3.0 years.

Operationally, the REIT’s occupancy rate “continued to be maintained above a healthy 90.0%.” There isn’t an exact figure given, but it’s likely that the REIT’s occupancy rate has declined from 91.2% seen at the end of 2013.

Foolish Summary

Interestingly, Sabana REIT has implemented a distribution reinvestment plan where unitholders are able to choose between cash or additional units of the REIT as distributions. This is often a strategy for a listed entity to still give out dividends but yet save on cash.

In any case, it’s important to point out that Sabana REIT’s big drop in DPU for 2014 is not due to any one-time expenses which can be reversed going forward. Investors should be aware of the possibility that the REIT’s reduced profit margins and distributions might be something which will persist in the future.

In fact, Sabana REIT’s past distributions could even be considered to have been artificially boosted given that there was the 3-year lease management fee waiver when it got listed.

With a DPU of 7.33 cents for 2014, Sabana REIT has a historical dividend yield of 7.9% based on its close yesterday at a price of S$0.925 per unit.

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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.