Sabana – Phillip

Company Overview

Sabana REIT is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shari’ah investment principles.

• Acquisition of 6 Woodlands Loop at $14.8m

• DPU accretion resulted from debt financing

• Incorporated payout ratio of 94.0% from 2013 to 2015

• Maintain Buy recommendation but with target price cuts to $1.04

What is the news?

Sabana REIT wrapped up 2011 with a total of five properties. The 3-storey general industrial building located at 6 Woodlands Loop was its latest acquisition completed on 15 December 2011. The single-tenanted property is strategically located along Woodlands Loop and is easily accessible by Bukit Timah Expressway (BKE) and Seletar Expressway (SLE). The permissible plot ratio of the site is not completely optimized to its potential and may provide addition and alternation opportunity should the need arisen from the existing tenant.

Upon completion, a lease term of three years commencing from the date of completion of the property will be entered with the existing tenant, MMI Holdings Limited. As the contractual rents are below the market rate, up to a maximum of $958,058 rental income support will be supplemented for a period of three years under the Sales and Purchase agreement.

How do we view this?

DPU expects to improve by 0.06 cents as debt financing is employed to purchase the property asset. While the gearing ratio is expected to increase to c.34.2% upon completion based on the announcement. This leaves Sabana REIT with a debt headroom of c.$110m given 40% leverage.

Investment Actions?

Sabana REIT’s distribution policy is to distribute 100% of its taxable income and tax-exempt income (if any) till 31 December 2012 and thereafter to distribute at least 90%. We therefore assume a payout ratio of 94.0% from 2013- 2015 in order to maintain stability of distributions while retain some earnings for capital expenditure. To reiterate, we also assume occupancy to drop in 2013 as the head tenant may not renew the contract when the bulk of the master leases expired. Hence, FY13 DPU will slide down but recover in FY14 and FY15. Above assumptions trim our target price to $1.04 and it still warrants a buy call with a potential upside 18.2% excluding dividend yield.