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Sabana REIT's untapped GFA could raise NAV as New Tech Park undergoes AEI

Goola Warden
Goola Warden • 5 min read
Sabana REIT's untapped GFA could raise NAV as New Tech Park undergoes AEI
SINGAPORE (Nov 18): Sabana Shari’ah Compliant Industrial Real Estate Investment Trust’s distributions per unit in 3QFY2019 rose 1.3% y-o-y to 0.78 cent. For the nine months to Sept 30, however, DPU continued to show a decline to 2.15 cents, down 13% y
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SINGAPORE (Nov 18): Sabana Shari’ah Compliant Industrial Real Estate Investment Trust’s distributions per unit in 3QFY2019 rose 1.3% y-o-y to 0.78 cent. For the nine months to Sept 30, however, DPU continued to show a decline to 2.15 cents, down 13% y-o-y.

On the other hand, its net asset value (NAV) is now 56 cents, up 3.7% from the beginning of 2018, when Donald Han, CEO of Sabana REIT’s manager, took over. The REIT’s gearing fell sharply and is now just 30.8%. Financing costs are lower, and interest cover is higher. On the flip side, the occupancy rate, at 80.6%, is lower than the 85.4% level as at end-FY2017.

Han’s target at the time was to raise the occupancy rate to around 88%. Still, NAV should be rising because of asset enhancement initiatives (AEIs). When Han was appointed CEO, he unveiled three main strategic initiatives. The first was to drive revenue and occupancy rate by ramping up marketing efforts and focusing on retaining key tenants, as well as divesting non-performing assets.

The second phase was to carry out AEIs. New Tech Park, which accounts for a third of Sabana REIT’s portfolio assets by value, was identified as having unutilised gross floor area. The first phase of AEI comprised adding 3,979.69 sq m (42,821 sq ft) of GFA, of which 3,400 sq m (36,584 sq ft) are reserved for retail. Retail rents are significantly higher than industrial and business park rents.

“We are in a very prime location, across from the [Lorong Chuan] MRT station, in an area with a large MNC and PMEB [professionals, managers, executives and businessmen] workforce and near educational institutions,” Han says of New Tech Park during a results briefing last month. He declined to reveal retail rents, but indicated that there will be an F&B component. There could also be a supermarket.

The third phase of Han’s strategy — after stabilising the portfolio — was to make accretive acquisitions, including from overseas.

Untapped GFA

In September, DBS Research released a report identifying a further seven Sabana REIT properties (out of a total of 18) with unutilised GFA. The DBS report calculates that Sabana REIT’s portfolio has 1.56 million sq ft of unutilised GFA. The biggest uplifts would be for three properties: 1 Tuas Avenue 4, where GFA could be lifted by 130%; 33 & 35 Penjuru Drive (142% lift in GFA); and 26 Loyang (226% increase in GFA).

DBS Research says in the report: “In a bull-case redevelopment scenario that assumes the (i) maximisation of plot ratios, (ii) higher rents after the AEI, (iii) NPI [net property income] margins of between 65% and 80% for multi-tenanted buildings, (iv) NPI margins of between 80% and 90% for master-leased buildings, and (v) capitalisation rates of between 6.25% and 6.75%, we obtained a result showing a potential $36.3 million and 44.8% uplift to FY2018’s gross rental income and portfolio value respectively. This positive result has yet to be factored into our estimates and target price.”

In fact, DBS Research has a “hold” rating on Sabana REIT because of uncertainties such as higher vacancy rates, and the ability of the manager to drive AEIs.

New unitholders

ESR Cayman, which was listed last month on the Hong Kong Exchange, raising US$1.6 billion ($2.18 billion), had no such hesitations about Sabana REIT’s potential. In June, ESR Cayman acquired Vibrant Group’s stake in Sabana REIT, taking its stake to 21.4%, and in July, it acquired Vibrant’s stake in Sabana REIT’s manager. ESR Cayman also owns a controlling stake in ESR-REIT’s manager and around 12% of ESR-REIT.

On Nov 14, activist shareholder Quarz Capital Management wrote an open letter to ESR Cayman and Sabana REIT in which it disclosed that it had acquired a large stake in Sabana REIT.

Quarz suggested in the letter that ESR-REIT should merge with Sabana REIT in a cash and unit transaction in which 0.92 unit of ESR-REIT and 6.7 cents of cash could be exchanged for one unit of Sabana REIT for a total value of 54.5 cents, or a 2.7% discount to Sabana REIT’s book value.

The rationale for a merger, according to the letter, was so that ESR-REIT unitholders could benefit from a 7% jump in distribution per unit for a DPU yield of 7.1% post-merger, owing to the optimisation of the many levers for Sabana REIT’s portfolio, which include the addition of a retail component at 151 Lorong Chuan, and optimisation of management fee payments and occupancy rates. Eventually, the enlarged ESR-REIT could become a component in the FTSE EPRA NAREIT Developed Market Index.

For Sabana REIT unitholders and Quarz, the takeover would address the persistent discount at which Sabana REIT’s unit price trades to its NAV. Quarz also believes that Sabana REIT’s portfolio is undervalued because of the untapped GFA.

Uplift to NAV of as much as 19%

As at Sept 30, Sabana REIT’s investment properties were valued at $938.99 million, with a further $15.6 million properties held for sale. A 44.8% uplift to the current portfolio translates into a revalued NAV of around 60 cents, depending on discount rates and other considerations. This represents a 7% upside to NAV and a 30% upside to the REIT’s last traded price of 46 cents. DBS Research has calculated a revalued NAV of 67 cents for Sabana REIT, which represents an uplift of 19.6% to NAV.

Sabana REIT has had a checkered history. In 2017, a group of minority unitholders requisitioned an extraordinary general meeting to remove the manager. While it did not succeed, Sabana REIT’s manager at the time lost its general mandate (to issue units up to 20% of the REIT’s units outstanding in order to either make a modest acquisition or pay for management fees) in April 2017. It won back the mandate at the REIT’s 2018 AGM.

Now, with the presence of an activist investor and the REIT’s untapped GFA, it appears that Sabana REIT could reignite investors’ interest.

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