Sabana – Lim & Tan

Sabana Shariah Compliant REIT ($1.04, down 4 cents) 1Q’14 distribution per unit declined 22% yoy to 1.88 cents, coming in below expectations.

The weaker than expected DPU refl ects the lower net property income as their Lorong Chuan property was converted into a multitenanted lease arrangement and straight-lining adjustments on rental income for a major tenant given rent-free period in 1Q’14.

Net profi t fell 29% yoy in 1Q’14 to $9.4mln due to lower property income, higher property tax, land rent, maintenance and lease admin expenses, as well as 39% increase in fi nance costs due to an early re-fi nancing exercise in 1Q’14.

If not for new contributions from 508 Chai Chee Lane which was acquired in Sept’13, performance would have been even weaker.

Looking ahead, management will continue to intensify their marketing and leasing efforts to improve their portfolio occupancy and also look for opportunities to recycle their capital by divesting underperforming assets and use the sale proceeds to re-invest in new acquisitions, pare down debt and distribute capital gains from divestments.

According to DTZ research, rents for conventional industrial space was held up on the back of expansion in the manufacturing sector, although that may face supply side pressures going forward.

Capital values were stagnant for the 3rd consecutive quarter due to cooling measures having been implemented (sellers stamp duty and total debt servicing ratio).

Annualizing Sabana’s latest DPU would translate to a forward yield of 7.2%. This would put it on par with much stronger peer such as Mapletree Industrial Trust’s (MIT) 7.1%. We prefer MIT given its expected 11% DPU growth in 2014 (against Sabana’s 22% declined) as well as stronger parentage and tenant base.