Sabana – Phillip

On course to cross $1 billion portfolio

•Acquisition of 3A Joo Koon Circle and 2 Toh Tuck Link at a total price of $80m

•DPU accretive resulted from debt financing

•Maintain Buy recommendation with unchanged target price of $1.120

Bagged two industrial properties through third-party acquisition

Sabana REIT purchased two industrial properties, comprising a factory and a warehouse in the western part of Singapore. The property at 3A Joo Koon Circle, is a 2-storey building with mezzanine floor and a 3-storey factory building, well served by two major expressways – Pan-Island Expressway (PIE) and Ayer Rajah Expressway (AYE) – and close proximity to Joo Koon MRT station. While the property at 2 Toh Tuck Link, is a 6-storey warehouse, well connected by both PIE and AYE and approximately 2 km away from Jurong East and Clementi MRT stations.

Both properties have a total GFA of 398,315 sq ft. This raised the portfolio GFA from 3.4 million sq ft to 3.8 million sq ft. Since the two properties are segmented under the general industrial and warehouse property type, the lion share of high-tech industrial is reduced to 38% in term of percentage to the entire portfolio GFA. The inclusion of new property assets will diversify the source of income stream and result in less reliance on Master lessees such as Branbury Investments Ltd and its sponsor which have substantial revenue contributions. These two properties were sold to Sabana REIT at a total price of $80m through a sale and leaseback arrangement. Upon completion, a triple net master lease for a term of three years will be entered and the lease will be expired in 2014. Both transactions will further lengthen the weighted master lease tenure and spread out the renewal risk in the event that the master lessees choose not to renew the lease.

The purchases were wholly financed by debt and would enhance DPU growth. The gearing ratio is expected to increase to c.33.7% upon completion. Based on comfortable leverage target of 40%, Sabana REIT has a debt headroom of c.$80m to drive acquisition growth.

Valuation

With the surge of 31% in semi-annual review of average development charge rates for industrial and warehousing use on 1 September 2011, we opined that the revaluation of properties will boost the asset value to exceed its target of $1 billion portfolio even without any further acquisition towards the end of 2011. Similar to the acquisition made last month, both the new acquisitions are not factored into our model as details of the lease agreement are not available. The rental contributions from the three acquisitions will take place in the fourth quarter when the transactions are understood to be completed. Anticipated DPU growth and revaluation gains will support the price from the external headwinds. Based on previous closing price, our target price represents a 26% potential upside. Thus, we maintain our BUY recommendation with an unchanged target price of $1.120.