Many of Sabana REIT&rsquo s unitholders appear comfortable with holding on to their units, with many of them attracted to the REIT&rsquo s distribution reinvestment programme (DRP). And, as Sabana REIT moves towards $1 billion in assets, independent director Charlie Chan Wai Kheong has been a valuable asset as well, according to Donald Han, CEO of Sabana REIT&rsquo s manager.

 

First off, the DRP: in 3QFY2021, the take-up rate was 49%. &ldquo The take-up rate of 49% was the highest in our history,&rdquo Han says. &ldquo It is something unitholders like, and a good strategy to ensure unitholders participate and accumulate units at a discounted rate. On our part, we are paying back unitholders for their support.&rdquo

Ultimately, DRP provides Sabana REIT with the liquidity to grow further as it adds to the REIT&rsquo s capital. Unitholders&rsquo funds rose to $555.97 million from $539.7 million. That underpinned a net asset value gain of one cent to 52 cents despite higher number of units at 1.069 billion.

 

DRP take-up, NAV increase, and executing two of three phases in Sabana REIT&rsquo s refreshed strategy gives Han the confidence to upsize Sabana REIT&rsquo s assets to $1 billion in the next three to five years.

 

As at Dec 31, 2021, Sabana REIT&rsquo s property valuation rose by $26.5 million to $866.2 million. The rise in valuation was underpinned by higher valuations for 151 Lorong Chuan (+6.5%), 23 Serangoon North Avenue 5 (+1.3%), 8 Commonweath Lane (+3.6%), 15 Jalan Kilang Barat (+1.9%) and 10 Changi South Street 2 (+8.9%). The higher valuations were supported by asset enhancement initiatives (AEI).

 

The most extensive AEI was undertaken at 151 Lorong Chuan - better known as NewTech Park. A retail mall - NTP+ - was carved out of new GFA, providing a valuation lift to $355 million in FY2021 from $333.4 million a year ago.

 

Refreshed strategy delivers 

 

Han&rsquo s refreshed strategy comprises three phases. The first phase was about divesting non-performing assets, increasing occupancy rates. Overall occupancy rate as at Dec 31, 2021 was 85.4%, up from 76.5% as at Dec 31, 2020, and the highest since 2018. The improvement came on the back of the 100% occupancy at NTP+ and higher occupancy rates across the portfolio. Twelve out of 18 properties in the portfolio achieved occupancy rates of 90% and above as at end-2021.

The second phase involved AEIs. At lease five AEIs were undertaken between 2018 - when Han came on board - and 2021. These AEIs caused valuations to   rise.   Of the AEIs, the largest was NTP&rsquo s upgrade with the implementation of a new mall NTP+ from unused gross floor area. NTP+ has had a positive impact on Sabana REIT&rsquo s portfolio as it attracted new tenants to NTP, and at higher rents. In addition, NTP+ drew in a new tenant mix from the F& B and retail sectors.

 

Rental reversions in 2021 was a positive 10.5% y-o-y. In 4Q2021, rental reversion was a positive 9.4% y-o-y, the seventh positive quarterly reversion in the past eight quarters. A lot the upside was from NTP, as leases that were signed two to three years ago came up for renewal. &ldquo At that time there was no NTP+. As leases are being renewed during NTP+ completion, you can expect a higher value proposition from tenants. The positive reversions were also due to the rejuvenation for some of our other properties,&rdquo Han says. However, in 2022, Sabana REIT faces a higher base, Han cautions.

 

For other properties, Han and his team have focused on attracting tenants in expansionary sectors such as electronics, healthcare, data centre, and logistics sectors. For instance, any visitor to 23 Serangoon North Avenue 5 - which had the highest valuation growth - would have noticed that an anchor tenant is AEM Holdings.

 

The refreshed strategy delivered a 10.5% y-o-y growth in distribution per unit (DPU) to 3.05 cents. However, the headline DPU in 2HFY2021 fell by 31.4% to 1.57 cents. This is because of various one-offs in 2HFY2020. The 2HFY2021 DPU of 1.57 cents respresents an 11.3% y-o-y rise from operations when compared with 2HFY2020. The full 2.29 cents DPU in 2HFY2020 comprised a one-off DPU of 0.3 cents resulting from a $3.2 million roll-over from previous years, and DPU of 0.58 cents which was from witheld distribution of $6.1 million from 1HFY2020.

 

Getting to $1 billion

 

Han&rsquo s target is for Sabana REIT&rsquo s assets to get to $1 billion in the next three to five years. This can achieved by a combination of better valuations for its current portfolio and acquisitions. One of the properties with the potential for an uplift is 1 Tuas Avenue 4.

 

In 2018, the REIT&rsquo s manager received an offer for this property and signed a contract for sale. In April 2019, the buyer did not receive permission to acquire the property - all sales and purchases have to be approved by JTC, and the property was revalued downward to just under $11 million. The buyer had probably wanted to use the property as a data centre and in 2019 there was a moratorium on building new data centres. Now the property is no longer on the market.

&ldquo We will look for a target for cold storage logistics where there is really no supply and there is demand - eg with chillers, freezers. With high power provision for this property I can have life sciences and laboratories as this is located near the biotech park,&rdquo Han reveals. Yields on cold storage assets of 5% to 6% are not as compressed as data centres.

 

&ldquo We are a small REIT. We don&rsquo t want to go out on a speculative building, especially now when costs are 20% to 30% higher. Tuas is where you have a lot of supply,&rdquo Han says. The property&rsquo s ultimate asset class depends on the identification of the tenant. If it&rsquo s a data centre tenant - now that the moratorium is lifted, subject to conditions - the manager is open to a data centre tenant on a core and shell basis.

For acquisitions, Han&rsquo s preference is to stay in Singapore. &ldquo Singapore is more immediate in the growth value stage of our refreshed strategy,&rdquo he says.  

 

Overseas markets are not easy because of greater risk. Sabana REIT&rsquo s manager is owned by ESR Cayman, which also holds the most units. ESR Cayman is sponsor to ESR-REIT and ARA LOGOS Logistics Trust following its acquisition of LOGOS and ARA.

 

Chemical Hub revalued down 

Unfortunately, despite all Han&rsquo s efforts, one unitholder has expressed dissatisfaction in an open letter to the manager&rsquo s efforts. Part of this could be attributed to the lack of progress on 33& 35 Penjuru Lane, which was used as a chemical logistics hub by Sabana REIT&rsquo s previous sponsor Vibrant Group. Following the expiry of Vibrant&rsquo s master lease, Sabana REIT has leased the property to another tenant.

 

&ldquo This was not renewed by the previous master lessee but we replaced outgoing tenants with a new tenant,&rdquo Han says. What about rents? The dissatisfied unitholder believed 33& 35 Penjuru to be under-rented and thought that an uplift in rents would raise valuations. But this doesn&rsquo t seem to be the case.

&ldquo It is a competitive rate in view that everything was taken into consideration. There are a lot of things to consider eg capex by landlord and the area the tenant is leasing. In this case they are renting the ground floor and they have to take ground rental and it&rsquo s a triple net lease. This was the optimum tenant. We found them to be a compelling tenant to replace Vibrant. While Vibrant has been good to us we want to make sure we diversify risk,&rdquo Han explains.

In 2020 Vibrant was a concentation risk with master leases for 12% by area of Sabana REIT&rsquo s portfolio.   By bringing in new tenants concentration risk is reduced, Han reasons.

 

As a result of the new rent, 33& 35 Penjuru Lane was valued at $40.8 million as at Dec 31, 2021, down from $42.7 million as at Dec 31, 2020. As at end-FY2019, 33& 35 Penjuru Lane was valued at $51 million. The land lease for the property runs to 2045. It was at $51 million that the dissatisfied unitholder believed the property had more upside. In 2010, the property was sold into Sabana REIT for $78.9 million.

Elsewhere in the Penjuru area, 51 Penjuru Road and 34 Penjuru Lane were valued at $29.1 million and $29.8 million as at Dec 31, 2021. Both valuations were below their 2020 valuations of $32.8 million for 51 Penjuru Road and $33 million for 34 Penjuru Lane. The land lease for 51 Penjuru Road matures in 2054 and 34 Penjuru Lane matures in 2032.

 

The dissastisfied unitholder was hopeful that at least one of the Penjuru properties could be divested to other REITs which have properties in that vicinity. Both Mapletree Logistics Trust and AIMS APAC REIT own logistics assets in Penjuru, and ESR-REIT acquired a ramp-up logistics property at 46A Tanjong Penjuru in May 2021.

 

Not all warehouses are ramp-up 

 

As Han explains, all of Sabana REIT&rsquo s warehouses make use of cargo lifts, and none are ramp-up warehouses. Ramp-up warehouses are in demand as every floor is viewed as the ground floor.

 

&ldquo A lot of our warehouses are not ramp-up. In fact all are not ramp-up. If we are to do any logistics acquisitions or redevelop or AEI, we would do our first ramp-up,&rdquo Han says. &ldquo Any logistics properties that we buy in Singapore must have new specs and part of that is to have ramp-up facilities,&rdquo he adds.

 

&ldquo Since the current directors came aboard it&rsquo s been nothing but positive news,&rdquo Han replies to a question on how unitholders would vote when independent director Chan, is put to the vote in an AGM. &ldquo He is doing such a marvellous job. He is also a unitholder and understands the demands and issues involved in being a unitholder, and he provides a different perspective. We want him to represent not just the independent board, but his perspective for unitholders is important for us to drive this refreshed strategy to ensure we are in line with all unitholders&rsquo aspirations,&rdquo Han explains.

 

Indeed, since Han introduced his refreshed strategy, 200 million to 300 million units have already changed hands at a higher price than the six-month moving average. &ldquo There are new buyers in our REIT since there is confidence in the manager to buy more Sabana units,&rdquo Han says of this phenomenon.

  He is hopeful that the new unitholders are sufficiently confident in Sabana REIT&rsquo s manager to support resolutions tabled in the AGM. &ldquo I&rsquo m actually looking forward to the AGM. One third of our units have already changed hands to those who are fully supportive of Sabana REIT manager&rsquo s refreshed strategy. We are trying to engage them as well. It will be a two-way process,&rdquo he acknowledges.   

Market watchers are optimistic with S-Reits well poised to weather rate hikes and economic reopening driving rents upwards

 

IT is results season for Singapore-listed real estate investment trusts (S-Reits), and Sabana Industrial Real Estate Investment Trust (Sabana Reit), the first S-Reit to report its results for the period ended Dec 31, 2021, has given investors some inkling of what to expect.

 

Sabana Reit on Jan 20 posted a distribution per unit (DPU) of S$0.0157 for the six months ended December, down 31.4 per cent compared to DPU of S$0.0229 in the year-ago period.

 

The Reit manager explained that the drop was due to a higher DPU base in H2 2020, which included distribution previously retained in H1 2020 for " prudent cash management amidst Covid-19 uncertainties" .

 

Excluding this and one-off rollover adjustments from prior years, Sabana Reit' s H2 2021 DPU would have been an improvement of 11.3 per cent.

 

Speaking at a post-results media call, chief executive officer of the Sabana Reit manager Donald Han said other S-Reits could face a similar situation in terms of DPU performance for the latest period.

 

" A lot of the Reits would have actually reported fairly higher second half 2020 numbers compared to the second half of 2021. You' ll find that the numbers for H2 2020 would be a bit bumped up," Han said.

 

He explained that a number of Reits had retained some of their distributions in H1 2020 because of the Covid-19 circuit breaker. These distributions were mostly released when the situation improved in H2 2020. " So you will find this trend," he added.

 

While investors should not hold their breath on the DPU front, most S-Reits are expected to report improvements to gross revenue and net property income due to contributions from new acquisitions.

 

Over half of the S-Reits had announced asset acquisitions in 2021, with total purchase consideration amounting to at least S$12.7 billion.

 

RHB analyst Vijay Natarajan noted that over three-fifths of acquisitions last year were for industrial assets and a quarter were for office properties.

 

" Moving into 2022, we expect the acquisition pace to slow down to S$8-10 billion (due to) an anticipated rise in interest rates and compressed capitalisation rates," Natarajan said.

 

" A key market concern has been the impact of impending interest rate hikes&hellip (but) from a balance sheet standpoint, S-Reits are well poised to weather the rate hikes," he added.

 

According to Natarajan, S-Reits have an average gearing ratio of 37 per cent with nearly 77 per cent of debts hedged. Interest cover stands at an average of 5.2 times with weighted average debt maturity of 2.8 years.

 

While rising interest rates could initially pose headwinds for the Reits, Jefferies analyst Krishna Guha believes the S-Reit sector could re-rate with inflating rents and occupancy, or a change in interest rate trajectory.

 

" Notwithstanding the initial underperformance, the S-Reit sector delivered 10 per cent annual return during the last rate hike cycle from December 2015 to to December 2018," Guha said. " We expect the S-Reit sector to deliver similar performance in the upcoming rate hike cycle as well."

 

Guha expects that commercial Reits, which have shorter weighted average lease expiries, will be the first to benefit as inflation tailwinds and gradual reopening from the pandemic drive spot rents upwards.

 

" While Q3 data showed continued weakness in rents for both retail and office, anecdotally, we hear of mid-teens mark-up of retail rents. Q4 data may reveal if it is a trend or just one-offs," he said.

 

Analysts are also optimistic that hospitality Reits could recover as travel demand returns.

 

" We remain optimistic that the industry will rebound and expect it to gather pace as soon as Omicron case numbers wane," said CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee in a recent report.

 

" In our view, the world is now better equipped to tackle any new development in the pandemic. Unlike last year when the world went into total lockdown, the countries are less keen to impose strict measures this time round, thanks to the availability of vaccines and increasing vaccination rates," they added.

 

However, RHB' s Natarajan believes that, despite some green shoots, hospitality Reits are at least 6 months away from " a meaningful increase in numbers" .

 

" Overall, we recommend investors adopt a barbell strategy with industrial Reits for stable yields, as well as a mix of office and retail Reits to ride on near-term growth," he said.

DBS Group Research on Friday (Jan 21) downgraded Sabana Industrial Real Estate Investment Trust (Sabana Reit) Sabana Reit: M1GU 0% to " hold" from " buy" based on valuations.

 

Sabana Reit' s share price has risen more than 20 per cent in the past year as its portfolio earnings recovered from the height of the Covid-19 outbreak. Optimism over its portfolio rejuvenation has also taken shape, DBS said in a research note.

 

The research team has maintained its target price of S$0.48 on Sabana Reit, representing a potential upside of about 5.5 per cent to Sabana Reit' s last trading price of S$0.455 as at 3.08 pm on Friday.

 

DBS expects the completion of NTP+ at 151 Lorong Chuan to deliver a boost to Sabana Reit' s FY2022 earnings - adding about S$3.5 million to revenue and boosting occupancies and rental reversions.

 

Thus, the research team projects a distribution per unit compound annual growth rate of about 7 per cent over the next 2 years.

 

" At such levels, we believe that Sabana Reit is fairly priced and, therefore, have maintained our target price," DBS analysts Dale Lim and Derek Tan said.

 

Sabana Reit' s manager is also planning more asset enhancement initiatives (AEIs). It has identified 1 Tuas Avenue 4 as its next major AEI candidate to transform the property into a specialised logistics facility that offers cold storage.

 

Cold storage warehouses remain limited in the Tuas precinct and have the ability to potentially command better rents, the analysts said.

 

They are waiting for more clarity on these AEI plans to drive the next leg of Sabana Reit' s earnings growth. As 1 Tuas Avenue 4 is currently vacant, any lease commitments and revenue would lead to " incremental upside to earnings" , the analysts noted.

 

On Thursday, Donald Han, the chief executive of Sabana Reit' s manager said the Reit is moving into the next phase of its growth strategy as it targets to increase its portfolio value to more than S$1 billion over the next 3 to 5 years.

 

Part of this strategy will see Sabana Reit continue to build on its AEIs, Han said in a media call following the release of Sabana Reit' s FY2021 results on the same day.

 

Last year, Sabana Reit performed AEIs at 5 of its properties, which contributed to their respective valuations increasing by between 1.9 per cent and 11.3 per cent. Overall, Sabana Reit' s total portfolio valuation rose 3.1 per cent year on year to S$866.2 million as at end-December 2021, from S$840.1 million a year ago.

THE response last week from the manager of Sabana Shari' ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) to recent letters and public releases from Quarz Capital Management and Black Crane Capital was understandably self-serving.

 

But it also reflected the apathetic, box-ticking culture that pervades the local corporate sector, and often results in minority investors getting a raw deal.

 

In particular, in explaining why it should not have to bear the costs of the failed merger with ESR-Reit, as Quarz and Black Crane are demanding, the manager of Sabana Reit took the view that it had no choice but to bring the deal to unitholders.

 

" Invariably, once in a while, there are issues out of the ordinary course of business of a Reit that can arise which are beyond the Reit manager' s contractual capacity as a manager to decide on behalf of unitholders of the Reits that they manage, just as there can be major matters beyond the power of any other boards to bind shareholders of listed corporations in general," it said.

 

Sabana Reit' s manager went on to say that boards have to put such matters before investors at an extraordinary general meeting (EGM). Professional external advice has to be sought by the boards to evaluate the deals, and provide appropriate recommendations to investors. Meanwhile, there are regulations in place to prevent conflicted investors from voting.

 

" Such is the due process of governance norms and the legal position in Singapore and internationally," Sabana Reit' s manager said.

 

" It does not matter that the EGMs may sometimes end in unsuccessful outcomes, the key is that such due process must take place, and accordingly, all related fees and costs are payable by the listed entities and Reits, and certainly not by their boards or their Reit managers," it added.

 

Useless professional advice

 

Yet, the manager of Sabana Reit did not just bring the proposed merger with ESR-Reit to its unitholders it actively recommended the transaction, even after it became clear that a significant number of Sabana Reit unit-holders were against it.

 

This is why many minority investors, including Quarz and Black Crane, want the manager to bear the cost of the proposed merger. Why should they pay for something they knew they did not want from the outset?

 

More importantly, the advice Sabana Reit' s manager obtained did not address the principal concerns that minority investors had about the deal.

 

Under the proposed merger, Sabana Reit was valued at a steep discount to its net asset value. On a pro forma basis, unitholders of Sabana Reit would have seen a 12.9 per cent accretion in distribution per unit, but a 20.7 per cent dilution in NAV per share. They would also have been left holding units in a Reit with sharply higher leverage - 41.7 per cent instead of 33.7 per cent.

 

This column noted in November last year that Deloitte & Touche Corporate Finance, the independent financial adviser (IFA) appointed by Sabana Reit' s manager, did not compare these pro forma numbers with those of the precedent transactions it had identified.

 

If it had done so, it would have shown unitholders of Sabana Reit that they stood to suffer a bigger dilution in NAV than unitholders of the target Reits in other similar merger deals.

 

In fact, the IFA' s terms of reference strongly suggest that it did not even consider whether the pro forma accretion in Sabana Reit' s DPU was any better than the standalone DPU growth the Reit would have achieved over the next couple of years anyway.

 

Instead of merely going through the motions of " due process" , Sabana Reit' s manager should have ensured that the professional advice it obtained was actually useful to minority investors.

 

Alternative deals

 

Furthermore, once it had decided to bring the proposed merger to its unitholders, the manager of Sabana Reit ought to have proactively hunted for alternative deals.

 

It could, for instance, have invited offers from real estate investment funds for its entire property portfolio at a narrower discount to book value than ESR-Reit had proposed to pay.

 

Having more than one deal on the table would have helped unitholders of Sabana Reit judge the merits of the merger with ESR-Reit. It might also have encouraged ESR-Reit' s manager to sweeten its proposal.

 

Such independent-mindedness is unlikely to have pleased ESR Cayman, which owns the managers of both Sabana Reit and ESR Reit. But, as Sabana Reit' s manager confirmed in its response to Quarz and Black Crane, once the proposed merger was on the table, this should not have been a factor in its decision making.

 

" In the event of a conflict, Reit managers' directors then come under a statutory duty to prioritise the interests of public unitholders over those of the manager' s and the controlling unitholders' interest," Sabana Reit' s manager said.

 

Indeed, given the perspicacity Sabana Reit' s manager revealed in its recent response about why the market value of a listed Reit might diverge from the annual valuations of the assets it holds, and why larger

 

Reits tend to garner better market valuations than smaller Reits, it seems strange that a liquidation of Sabana Reit' s entire portfolio was not considered.

 

" Until and unless their properties are actually sold, such annual valuations are professional opinions, awaiting the actual test of the sale of assets," Sabana Reit' s manager said in one portion of its response.

 

Proactive independence

 

Admittedly, the board of Sabana Reit' s manager did not behave all that differently from the boards of many other companies that have been targets of mergers and acquisitions. But that is a sad statement on the standard of corporate governance in Singapore rather than an acceptable excuse.

 

What does genuine, proactive board independence look like? Consider how the board of Fraser and Neave handled the offer for the company from Thai billionaire Charoen Sirivadhanabhakdi more than eight years ago.

 

Instead of accepting the initial offer of S$8.88 per share, the board of F& N looked for ways to get its shareholders a better deal. A consortium led by OUE, which had been promised a " break fee" of S$50 million by F& N, came in with an alternative offer at S$9.08 per share.

 

The effort paid off. Determined to win, Mr Charoen subsequently raised his offer price to $9.55 per share.

 

If the board of Sabana Reit' s manager had displayed similar gumption, it is unlikely that its unitholders would be quite so disgruntled.

ACTIVIST unitholders' calls for going beyond " business as usual" are outside the power or discretion of the manager board to fulfil, the manager of the Sabana Shari' ah-Compliant Industrial Real Estate Investment Trust (Sabana Reit) said in a Singapore Exchange filing on Tuesday night.

 

The Reit manager' s " clarification announcement" was made in response to various issues raised via e-mail, letters and public releases by investment funds Quarz Capital Management and Black Crane Capital, which collectively hold about 13 per cent of the total units of Sabana Reit.

 

Quarz and Black Crane recently indicated that they did not intend to endorse the two independent directors who were appointed after December' s failed merger attempt between Sabana Reit and ESR-Reit. The two directors resigned in response.

 

One of Quarz and Black Crane' s demands is that the " S$2.7 million costs" of the failed merger be borne by the manager and not the Reit. In its Tuesday announcement, the Reit manager said that the next financial results release will show the actual costs and fees incurred in relation to the failed merger, which are " materially below the S$2.7 million earlier mentioned" .

 

The manager said it was " willing and open to pre-consulting" with Quarz and Black Crane on replacement candidates for independent directors.

 

The funds had also called for the " valuation gap" between Sabana Reit unit prices and net asset value to be closed, by " exploring options beyond business as usual" . But going beyond business as usual and looking at " unusual or strategic options" are outside the purview of the manager board, said the manager.

 

" Strategic options must be taken up as matters to be fully, frankly and properly discussed and worked out for a collective outcome among all unitholders at EGMs (extraordinary general meetings)."

 

The manager noted that the upcoming April annual general meeting will give unitholders the opportunity to vote on a scrip dividend plan, under which they can opt to receive distributions in units rather than cash, which " can add value" .