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.

Sabana Reit set to buy Woodlands industrial property

SABANA Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) is set to acquire a three-storey industrial property located at Woodlands for a purchase consideration of $14.8 million, to be funded by debt.

Easily accessible by Bukit Timah Expressway (BKE) and close to the Admiralty and Sembawang MRT stations, the JTC leasehold property located at located at 6 Woodlands Loop has a total gross floor area (GFA) of 77,544 square feet (sq ft) and a remaining tenure of about 43 years.

HSBC Institutional Trust Services (Singapore) Limited – in its capacity as the Reit’s trustee – has on Nov 25 entered into a sale and purchase agreement (SPA) with Winstant & Co Pte Ltd (Winstant & Co) for the general industrial building.

Upon completion of the acquisition, Sabana Reit will enter into a three-year lease agreement with MMI Holdings Limited, the existing tenant of the property.

Under the SPA, the vendor has agreed to provide rental income support, subject to a maximum of $958,058, for a period of three years from the acquisition completion date.

The manager of the Reit, Sabana Real Estate Investment Management Pte Ltd, believes the proposed transaction to be beneficial to Sabana Reit’s unit-holders, saying also that it is in line with with its strategy to invest in ‘income-producing real estate and real-estate related assets used for industrial purposes in Asia’ that provide strong cash flows and are yield-accretive.

The manager also said that the acquisition will raise the Reit’s weighted lease tenure as well as lower its lease expiry concentration in 2013 and 2015.

Factoring in the post-acquisition impact of the Woodlands industrial building along with recently completed purchases comprising properties based in Joo Koon and Toh Tuck, the Reit’s aggregate leverage stands at about 32.2 per cent. If including 39 Ubi Road 1 – a proposed acquisition that is pending legal completion – the aggregate leverage is expected to increase to 34.2 per cent.

The counter closed trading unchanged at 87 cents yesterday.

3Q FY11 Results

•3Q11 revenue $17.4m, NPI $16.6m, distributable income $13.6m

•3Q11 DPU of 2.14 cents

•Incorporated new acquisitions and raised DPU by 1.5-1.8% for FY12-15

•Increased cost of equity to 10% to account for heightened macro-economic risks

•Maintain Buy recommendation but trim target price to $1.080

3Q FY11 results

Sabana REIT reported slightly higher gross revenue and net property income, with an increase of 0.1% q-q to $17.4m and $16.6m respectively in 3Q11. Distributable income was $13.6m, 1.5% q-q lower than previous quarter due to higher other trust expenses. With a dip in distributable income, DPU pared down to 2.14 cents. The cumulative DPU for the reporting period between January and September was 7.36 cents, forming c.72% of our FY11 DPU estimates. Sabana’s portfolio was revalued to $901.3m, up 5.9% from $851.0m last year. Owing to the revaluation surplus, NAV per share inched up to $1.08 inclusive of distributable income as at end-September 2011, from $1.00 as at end-June 2011.

Hit $1 billion asset value set forth in IPO

Four industrial properties were acquired in 3Q11, with a combined GFA of 634,085 sq ft and worth approximately $132.3m. Coupled with the existing property portfolio, the asset value marginally surpasses the $1 billion target and uplifts the aggregate GFA to 3.9 million sq ft. The purchases were wholly funded by debt and therefore DPU accretive. With the incorporation of the purchases, DPU for FY12-15 rose in the range of 1.5-1.8%. While the gearing ratio is expected to increase to c.32.2% upon completion based on our model. This leaves Sabana REIT with a debt headroom of c.$130m given 40% leverage.

Brace for economy slowdown

Singapore’s PMI New Orders and New Export Orders contracted four months in a row, putting a brake on manufacturing sector. The anticipated repercussion will weigh on the demand as industrialists will be more cautious in their expansion plans given the grim global manufacturing data. On the back of heightened recession risk, some industrialists may choose to give up some spaces to save on occupancy costs. 2012 will be challenging year as about 15 million sq ft of industrial space is expected to come on stream. Capital and rental values for industrial property market are likely to stall by the end of 2011. Mild correction in industrial property prices and rents could be on the cards if negative feedback loop in the global economies continued to prevail.

Valuation

All 19 properties except 9 Tai Seng Drive are signed under master lease agreement, with next renewal still a distance (2013) from now. This will bring along income stability to the unit holders. On a side note, we assume occupancy to drop in 2013 as the head tenant may not renew the contract when the bulk of the master leases are to expire. Hence, FY13 DPU will slide down but recover in FY14 and FY15. Another takeaway is that Sabana REIT will keep refinancing risk at bay as loan will only mature in 2H 2013. However, we raised the cost of equity to 10% to take into consideration of escalating macro-economic risks. This trims our target price to $1.08 and it still warrants a buy call with a potential upside 19.3%.

Sabana Reit to buy 21 Joo Koon Crescent for about $20.3m

Sabana Shari'ah Compliant Industrial Real Estate Investment Trust is proposing to buy 21 Joo Koon Crescent, a three-storey factory building with ancillary office, for $20.274 million from AVA Global.

Under the sale and leaseback deal, the seller will upon completion of the sale, take a master lease of the entire premises for a four-year term on a triple net basis. Sabana Reit's manager intends to fund the acquisition by debt.

This acquisition, along with the proposed acquisitions of 39 Ubi Road 1, 3A Joo Koon Circle and 2 Toh Tuck Link, announced earlier will see the Reit's aggregate leverage (gross borrowings divided by total deposited property value) rise to 35 per cent from 25.1 per cent at June 30, 2011.

21 Joo Koon Crescent is a JTC leasehold estate of 30+30 years tenure starting from Feb 16, 1994, with a remaining tenure of about 43 years. The proposed transaction is subject to approval from JTC, among other conditions.

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.