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Latest Earnings From Sabana Shariah Compliant REIT

Sabana Shariah Compliant REIT (SGX: M1GU) released its fiscal fourth-quarter earnings (for the year and quarter ended 31 December 2015) yesterday evening.

The real estate investment trust 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. The REIT’s portfolio currently consists of 23 properties in Singapore, across the high-tech industrial, warehouse and logistics, chemical warehouse and logistics, and general industrial sectors.

Financial highlights

The REIT’s yearly revenue in 2015 had inched up by 0.5% to S$100.8 million. For the fourth-quarter, the REIT’s revenue had dipped by 2.9% to S$24.6 million.

The anaemic top-line performance had pressured Sabana Shariah REIT’s net property income (NPI), which declined by 1.8% to S$71.6 million for the year and 10.3% to S$16.3 million for the quarter.

The double-digit decline in NPI in the fourth quarter of 2015 is a worrying trend for Sabana Shariah REIT. The REIT had faced challenges from negative rental revisions and increased vacancies during the quarter. Property expenses also leaped by 16.1%, due to the conversion of three master leases into multi-tenanted leases.

As a result of the poor performances, Sabana Shariah REIT’s distribution per unit (DPU) for the year had dropped by 6.5% to 6.85 Singapore cents. The fourth-quarter’s performance was worse, as DPU had fallen by 15.7% to 1.50 cents compared to a year ago.

Interestingly, despite Sabana Shariah REIT’s lower net property income and DPU for the year, the manager’s fee for 2015 had increased by 1.5% from S$6.17 million in 2014 to S$6.26 million in 2015.

Coming to the balance sheet, here are some important figures to look out for:

Sabana Shariah REIT balance sheet 4Q2015
Source: Sabana Shariah REIT’s earnings presentations

Sabana Shariah REIT’s balance sheet has deteriorated significantly over the past year. Not only has aggregate leverage increased, but the REIT’s financing cost has nudged up, while the average tenor of borrowings has shortened. Even under the assumption that the ongoing divestment of two of the REIT’s properties have been completed, the aggregate leverage is still 39%.

Investors may want to take note of $237.8 million in loans that are maturing in 2016 and 2017. Given the possibility of a higher interest rate environment appearing, the REIT’s financing costs could edge higher.

The REIT’s net asset value (NAV) per unit had fallen considerably by 15% from S$1.06 at end-2014 to S$0.89.

Operational highlights and future outlook

As alluded to earlier, Sabana Shariah REIT had announced two divestments – 200 Pandan Loop and 3 Kallang Way – in the reporting year. The sale is estimated to produce net proceeds of S$53 million, which will be used to pay off part of the REIT’s debt of S$138 million that is due on November 2016.

The general business performance of Sabana Shariah REIT is subdued. The overall portfolio occupancy level at end-2015 was down by three percentage points to 87.7% when compared to end-2014. The portfolio’s weighted average lease term of expiry stands at 3.2 years, which is an improvement from the 2.5 years seen a year ago.

Of the 11 master leases that expired in the fourth-quarter of 2015, Sabana Shariah REIT’s management only managed to sign on six of them. Of the remaining five, three buildings have been converted into multi-tenanted properties (which may be unfavourable for the REIT, as it incurs higher costs), one will be sold (3 Kallang Way) while the last one is still pending a decision to be made.

In 2015, Sabana Shariah REIT also reported a 9.3% revaluation loss on its investment properties due partly to sluggish economic growth and an oversupply of industrial space.

Going forward, the REIT expects its “near-term financial performance to be weaker than the preceding quarters” because of higher costs associated with the aforementioned conversion of three master leases into multi-tenanted ones.

There are currently 11 months to go before four more master leases expire for Sabana Shariah REIT. The REIT’s manager “is working towards renewing or securing new master leases for three of them” while the remaining property is likely to be converted into a multi-tenanted lease.

Sabana Shariah REIT also warned that rental income for industrial properties may remain pressured due to oversupply of industrial buildings in Singapore and a global economic slowdown. While the government of Singapore has announced a reduction of land supply for industrial land sales, it will likely still take considerable time for the market to readjust.

The REIT’s distribution yield is 10% with its unit price of S$0.70 yesterday evening.

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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 Wilson Ong does not own shares in any companies mentioned.