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Sabana Shariah Compliant REIT’s Latest Earnings: No Growth in Sight

Sabana Shariah Compliant REIT (SGX: M1GU) had released its fiscal first-quarter earnings yesterday evening.

The real estate investment trust, which is sponsored by the small conglomerate Vibrant Group Ltd (SGX: F01), is unique for being the world’s first Shari’ah compliant REIT; Shari’ah is the moral code and religious law of the Islamic religion.

Currently, Sabana REIT owns a “diversified portfolio of 23 quality properties in Singapore, in the high-tech industrial, warehouse and logistics, chemical warehouse and logistics, as well as general industrial sectors.” The REIT’s total assets are worth a collective S$1.3 billion.

With these as a backdrop, let’s dive into Sabana REIT’s latest set of figures.

Financial highlights

Sabana REIT had achieved revenue of S$25.4 million in its fiscal first-quarter (three months ended 31 March 2015), a slight 3.2% year-on-year increase.

However, its net property income only managed to grow by 1.1% from a year ago to S$18.6 million as a result of much higher property expenses (items such as service, repairs, maintenance, insurance, property management fees, and taxes etc.).

But as we move further down the income statement, we see the important figure for unitholders – the income available for distribution to unitholders – shrink by 0.5% from S$13.04 million a year ago to S$12.97 million. As a result of a larger pool of units outstanding, Sabana REIT’s distribution per unit (DPU) for the quarter had dipped by 5.3% to 1.78 Singapore cents when pitted against the same quarter a year ago.

Investors might also want to note that Sabana REIT’s net asset value per unit (an important measure of a REIT’s underlying economic worth) had decreased slightly to S$1.06 as at 31 March 2015 from S$1.09 a year ago.

On the balance sheet front, here are some important figures to watch:

Sabana REIT's balance sheet figures

Source: Sabana REIT’s earnings releases

The REIT has unfortunately seen its balance sheet weaken compared to a year ago. Besides the slight increase in the aggregate leverage ratio, other tell-tale signs also include the bump-up in the financing cost (interest rates) and the decline in the interest cover.

Sabana REIT has a total of S$285.5 million in loans that are coming due in 2016 and 2017. Investors might want to watch the trust’s progress in refinancing its debt; in particular, the interest rate for any new borrowings will be something to keep an eye on as higher interest expenses can easily result in lower distributions for unitholders.

Elsewhere, Sabana REIT’s existing unitholders might also be interested to know that the REIT has S$72.5 million worth of outstanding convertible sukuk (Islamic “bonds”) that give the holders of the sukuk the option to convert their sukuk into units of the REITs at S$1.0971 per unit.

Although Sabana REIT’s current unit price of S$0.89 is lower than the conversion price, there’s still dilution risk for the REIT’s existing unitholders to be cognizant of given that the conversion period only comes about in 2017.

Operational highlights and future outlook

Operationally, Sabana REIT ended the first quarter of 2015 with a portfolio occupancy rate of 90.6% (on 23 properties). The 16 properties with master leases have 100% occupancies whereas the other seven properties that are multi-tenanted are only 77.7% occupied on average.

For some perspective, Sabana REIT had clocked in a portfolio occupancy rate of 90.6% (100% occupancy for 16 master-leased-properties; 76.9% occupancy for six multi-tenanted-facilities) as well for the first quarter of 2014. (It must be pointed out though that the REIT had just 22 properties back then).

Going forward, Sabana REIT warned that “the outlook of the industrial property sector is expected to be mixed, owning to uncertainties over Singapore’s economic growth prospects, a more challenging business climate and continued high business costs.”

Given Sabana REIT’s poor occupancy rates with multi-tenanted buildings so far, investors might want to keep an eye on how the REIT handles the expiration of 11 master leases seven months from now. To that point, Sabana REIT commented that it “is working towards renewing or securing new master leases for seven of them. The remaining four properties will likely be converted into multi-tenanted buildings.”

In the earnings release, Sabana REIT also revealed its intention to “divest underperforming or non-core assets to recycle… capital and will look for opportunities to do so.”

A Fool’s take

From a read of the REIT’s latest earnings release (as seen above) there seems to be a lack of growth opportunities. Furthermore, distributions have been falling; for instance the REIT’s DPU for the first quarter of 2013 was 2.41 cents, some 35% higher than the current quarterly DPU of 1.78 cents.

These are things for prospective as well as existing investors to consider when looking at 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.