17 July 2014

SABANA REIT - 1.86c Dividend Declared - July 2014

Sabana REIT announced the latest quarterly report yesterday. Below is the summary copied from company's announcement to the public:

Mr Xayaraj said, “During the quarter, our team successfully secured six new leases and 12 lease renewals. Portfolio occupancy remained largely unchanged at 90.8% in 2Q 2014 as compared to 90.6% in 1Q2014. Looking ahead, the market conditions are expected to remain challenging. We will continue to intensify our marketing and leasing efforts to improve our portfolio occupancy. We will also continue to make selective acquisitions. In addition, we will look for opportunities to recycle our capital by divesting underperforming assets.”

As at 30 June 2014, Sabana REIT’s portfolio consisted of 22 properties, with approximately 4.5 million square feet of gross floor area, leased to a diversified base 151 tenants. The portfolio’s weighted average lease term for underlying land in terms of gross floor area was 38.4 years. The largest allocation in terms of net lettable area was in the high‐tech industrial sector – approximately 46.0%. (Jack: high-tech industrial sector is also the largest gross revenue contributor to Sabana REIT)

On 11 June 2014, Sabana REIT received affirmation from Standard & Poor’s Rating Services (“S&P”) of its ‘BBB‐‘ long‐term corporate credit rating and ‘axA‐‘ long term ASEAN regional scale rating with a stable outlook. As at 30 June 2014, Sabana REIT had outstanding borrowings of S$455.8 million, of which 91.0% was effectively fixed. Sabana REIT’s total weighted average tenor of debt stood at 2.5 years, with only S$10.2 million due for refinancing in November 2014.

The Dividend Reinvestment Plan will be applied to 2Q 2014 distribution. Unitholders may elect to receive distributions for the period from 1 April 2014 to 30 June 2014 in the form of fully‐paid Units, instead of cash.

My Opinion

SABANA REIT implied dividend yield based on latest quarterly report is around 7.1% which I think is reasonable but not so attractive. So far about 60% of the gross revenue is contributed from high technology sector, so I believe that the occupancy rate should be easily still maintain at 90% level. The company has corporate credit rating with 91% of loan is fixed rate. I believe it can easily maintain a good credit rating even if interest rate to raise in next few years. The main issue is that the management is intensifying marketing efforts in getting more tenants which I believe it is already shown in the quarterly report (under property expenses explanation). The property expenses increased by 400% and above due to the reasons for higher property tax, maintenance, utilities, and applicable land rent expenses, in line with increase of multi-tenanted properties as well lease management fees being charged to 15 properties acquired during IPO.

Dilution Effect of Convertible Sukuk:

Assuming all the outstanding Convertible Sukuk are fully converted based on the current conversion price of
S$1.1358, the number of new units to be issued would be 63,831,661 units, representing 9.2% of the total number of the Trust’s units in issue and to be issued of 697,051,396 units as at 30 June 2014. The dilution effect is comparably small here. 

Company Strategy:

The company will continue its efforts in getting higher occupancy rate, optimizing the debt level as well as performing capital recycle by divesting under-performing assets and investing in better assets.

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