DBS Group Research, in a research note dated Jan 24, echoed Sabana Industrial REIT’s Trustee, that the REIT will continue to incurr internalisation costs this year.
On Jan 23, HSBC Trust Services (HSBC Trustee), as Sabana Industrial REIT’s trustee, stated that costs have been incurred and will continue to be incurred as it carries out the internalisation process.
In the meantime, HSBC Trustee has filed an originating application, under Order 32 of the Rules of Court 2021 of Singapore (the Order 32 Application), to help clarify necessary threshold issues and steps for the internalisation process and to ensure that the views of all Unitholders are properly considered in an appropriate forum. Order 32 of the Rules of Court allows for an action to be brought in the Singapore courts for the determination of any question arising in the execution of a trust. The respondent in the Order 32 Application is Quarz Capital Asia.
Prior to Sabana REIT’s Aug 7 EGM requisitioned by Quarz Capital Asia to vote to remove the external manager, and to direct the Trustee to implement an internalisation process, in resolutions proposed by Quarz Capital Asia, the Trustee had warned the the process would take at least 12 months and the process would incur costs.
No surprise then, that on Jan 23, Sabana Industrial REIT's manager announced that the REIT had incurred costs of $1.37 million for the period up to the requisition of the EGM by Quarz Capital Asia, held on Aug 7.
An additional $3.27 million of expenses were incurred, relating to the internalisation process based on the resolutions passed at the EGM. The retention of 10% of distributable income, coupled with one off impairment of receivables of $2 million caused total distributions to decline by 7.7% to $30.5 million. As a result, distributions per unit (DPU) declined by 21.2% in 2HFY2023 to 1.15 cents.
Together with 1HFY2023 DPU of 1.61 cents, FY2023's DPU declined by 9.5% to 2.76 cents.
In its Jan 24 report, DBS says FY2023 DPU would have matched FY2022’s DPU of 3.05 cents if not for the decision to retain 10% of distributable income. “With the 10% income retention, FY2023 DPU settled at 2.76 cts. The retention of income was a strategic move aimed at prudent capital management, considering the costs incurred and anticipated expenses associated with the internalisation process. To date, a total of $4.64 million has been spent on activities related to the internalisation of the REIT,” DBS says.
Operationally, Sabana REIT performed quite well, with revenue at an all-time high. “In FY2023, revenues surged to $111.9 million, marking a substantial 17.9% y-o-y increase. This strong growth can be attributed to consistently robust positive rental reversions and sustained stable occupancy rates,” DBS says.
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Net property income (NPI) also rose but at a more modest 3.2% y-o-y, to $55 million. “This increase was partially tempered by elevated operating and utility costs. It's worth noting that revenues could have been even higher were it not for a $2 million impairment in accounts receivable related to the master tenant at 33/35 Penjuru Lane. Legal proceedings concerning this matter are still ongoing,” DBS notes.
DBS says Sabana REIT is fully valued with a target price of 30 cents. There are too many known unknowns. “Key to watch will be the response from lenders given the change in ownership, and whether there would be a change in credit spreads when refinancing comes due, which could result in further pressure on DPUs. Our estimate is a 1% increase in interest rates could potentially cut DPUs by close to 9%. In addition, questions surrounding the ESR Group stake in the REIT will likely arise and could be an overhang for the stock should they relook at their stake in the medium term.”
