18 Nov 2019

Sabana REIT’s Untapped GFA Could Raise

NAV as New Tech Park Undergoes AEI
SINGAPORE (Nov 18): Sabana Shariah 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.

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 18 Nov 2019

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.

Goola Warden – The Edge

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