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

Sabana Shariah Compliant REIT (SGX: M1GU) released its fiscal second-quarter earnings last Thursday.

The real estate investment trust, which is sponsored by the small conglomerate Vibrant Group Ltd (SGX: F01), is actually the world’s first and largest Shari’ah compliant REIT. My colleague Chong Ser Jing had once ran through what it means for the REIT to be Shari’ah compliant:

“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’sestimated to be worth around US$1.4 trillion in 2011.”

Sabana REIT’s portfolio currently comprises of 23 properties in Singapore that can be segmented into four different industrial categories (namely high-tech industrial, warehouse and logistics, chemical warehouse and logistics, as well as general industrial).

The REIT’s portfolio has a net lettable area (NLA) of 3.731 million square feet and the properties are worth around S$1.26 billion collectively at the moment.

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

Financial highlights

For the REIT’s fiscal second-quarter (quarter ended 30 June 2015), gross revenue inched up by 0.2% year over year to S$25.4 million with net property income following suit with a 0.5% uptick to S$18.4 million.

This slight top-line growth can largely be attributed to new contributions from 10 Changi South Street 2 which Sabana REIT had acquired in December 2014. A higher portfolio occupancy level (more on this soon) also played a role.

In line with the top-line growth, Sabana REIT’s income available for distribution had managed to step up by 1.2% to S$13.16 million compared to a year ago. But, an enlarged unit base had resulted in a 3.2% year over year decline in the REIT’s distribution per unit (DPU) from 1.86 Singapore cents to 1.80 cents.

Sabana REIT’s net asset value per unit dipped by 2.8% year over year to S$1.06.

The REIT ended the reporting quarter with total borrowings of S$486 million and an aggregate leverage of 37.9%. These represent a slight deterioration of Sabana REIT’s balance sheet given that the selfsame figures were at S$456 million and 37%, respectively, in the same quarter a year ago.

Meanwhile, there are other important areas of the REIT’s debt-profile that had also weakened when compared to a year ago. You can see these in the table below:

Sabana REIT's balance sheet

Source: Sabana REIT’s earnings presentation

The REIT’s proportion of borrowings on fixed interest rates, average interest cost, and interest cover had all taken a few steps backward.

It’s worth noting too that the REIT has S$138 million and S$147.5 million worth of borrowings that are coming due by 2016 and 2017, respectively. Investors might want to keep an eye on Sabana REIT’s progress in refinancing its debt.

Operational highlights

Sabana REIT ended the reporting quarter with a portfolio-wide occupancy level of 90.9%. As mentioned earlier, the REIT has 23 industrial properties and 16 of them are on master-leases while seven have multi-tenanted leases. The former category are all 100% leased (which is great) but the latter acted as a drag on Sabana REIT’s performance with an occupancy level of just 78.3%.

The good news though, is that Sabana REIT’s portfolio performance had seen slight improvements compared to a year ago. For the quarter ended 30 June 2014, the REIT had 22 properties with an overall occupancy of 90.8%; this was further sub-divided into 16 master lease-properties that had 100% occupancy rates and six multi-tenant properties that were only 77.5% occupied.

Prospects and valuation

In the earnings release for the reporting quarter, Sabana REIT’s Manager acknowledged the challenging market conditions that lay ahead for the REIT.

The Manager also highlighted that the REIT’s focus for the year are on the 11 master leases that are expiring in 2015 (one at the end of the third-quarter and the rest coming in the fourth-quarter). Sabana REIT’s in the midst of renewing or securing new master leases for eight of the expiring master leases while the remaining three properties are expected to be converted into multi‐tenanted facilities.

With a closing price of S$0.865 last Thursday, Sabana REIT has a juicy distribution yield of 8.35% (based on annualized DPU of 7.22 cents). The REIT’s also valued at 0.82 times its latest book value at that price.

Fool’s take

There seems to be a lack of growth opportunities for Sabana REIT and to compound the issue, the likely conversion of three expiring master leases into multi-tenant leases may ding the REIT’s bottom-line judging by how the REIT’s current multi-tenanted properties have a much lower occupancy rate than the ones on master leases.

Investors will also need to consider the fact that more than half of Sabana REIT’s total borrowings are due by 2017. With the possibility of rising interest rates, the REIT may be hit by higher interest costs in the future which can lead to a lower DPU.

All said, there are two important areas with Sabana REIT that investors might want to keep an eye on: The REIT’s handling of its leases as well as the refinancing of its borrowings.

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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 James Yeo doesn’t own shares in any companies mentioned.