Sabana Shariah Compliant REIT’s Latest Earnings: More Pain Ahead?

Sabana Shariah Compliant REIT (SGX: M1GU) had released its fiscal third-quarter earnings (for the quarter ended 30 September 2015) 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 Shariah compliant REIT; Shariah is the moral code and religious law of the Islamic religion and the REIT is managed according to Shariah investment principles and procedures.

Sabana Shariah REIT focuses on industrial properties scattered around Singapore; it has a total of 23 properties which are collectively valued at S$1.26 billion as at 30 September 2015.

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

Financial highlights

Gross revenue for the quarter came in at S$25.5 million, up 1.5% from a year ago. Net property income stepped up by nearly the same amount (1.4%) to S$18.3 million.

Despite higher finance costs (a 6.2% year-on-year increase to S$5.47 million) stemming from a rise in debt, the REIT’s income available for distribution actually managed to grow by 2.2% to S$13.0 million. Unfortunately, due to a higher unit count, Sabana Shariah REIT’s distribution per unit (DPU) had dipped by 2.2% to 1.77 Singapore cents from 1.81 cents a year ago.

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

Sabana REIT balance sheet details (16 Oct 2015)

Source: Sabana REIT’s earnings presentations

The above table shows us how the REIT’s balance sheet has deteriorated compared to a year ago. Not only have the amount of borrowings stepped up, the REIT’s leverage ratio and financing cost (basically interest rate) have increased as well. In the meantime, Sabana REIT’s interest cover and proportion of borrowings with fixed interest rates had also declined. The latter point in particular is worth keeping an eye on given the possibility that rates may rise in the future.

Sabana REIT has a total of S$255.8 million in loans that are coming due in 2016 and 2017. Investors might want to watch the trust’s progress in refinancing its debt; the interest rate for any new borrowings may be something to note as higher interest expenses can easily result in lower distributions for unit-holders.

For the quarter, 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 from S$1.08 a year ago.

Operational highlights and a future outlook

Sabana REIT ended the quarter with an overall portfolio occupancy rate of 91.7%, slightly lower than the 91.8% seen in the previous year. The 16 properties with master leases have 100% occupancy rates whereas the other seven that are multi-tenanted are 80.4% occupied on average.

According to a recent report by credit rating agency Fitch Ratings, rental rates of industrial properties in Singapore will “remain under pressure in 3Q15, as falling demand meets increasing supply across all industrial asset types.” The piece further added that REITs with a higher proportion of near-term lease renewals and a greater proportion of low-specification assets are at higher risk.

With a low weighted average lease term to expiry (WALE) of only 1.7 years, Sabana REIT may have higher odds of running into some form of difficulty in the near future as compared to other industrial property REITs. For some perspective, Mapletree Industrial Trust (SGX: ME8U), which owns 84 properties across Singapore, has a WALE of 3.2 years (as at 30 June 2015), almost double that of Sabana REIT’s current number.

Kevin Xayaraj, the chief executive and executive director of Sabana REIT’s manager, acknowledged the difficulties in the earnings release and gave some idea of the REIT’s future plans:

“Market conditions continue to be challenging. However, that did not stop us from lifting our overall portfolio occupancy. We are especially pleased that we were able to secure a new tenant for 2 Toh Tuck Link that resulted in higher occupancy of 98.0% in 3Q 2015, up from 78.0% in 2Q 2015. We will continue to proactively manage our lease expiries and be aggressive with our marketing and leasing efforts.”

A Fool’s take

In sum, Sabana REIT is facing several headwinds in my view, such as increased competition as well as more expensive debt. It remains to be seen if it can maneuver past these obstacles.

To keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.