Should You Invest In Sabana Industrial REIT [Fundamental Analysis]

In this article, we'll be conducting a fundamental analysis of Sabana Industrial REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having high capital preservation ability.

Information Is Accurate Up To Jan 2024

Business Description

Sabana Industrial REIT is an industrial REIT that was listed in 2010 and owns 18 industrial properties in Singapore.

What I Like About Sabana REIT:

Relatively stable operational performances and stable distribution behaviour in the last 5 years (Figure 8)
Healthy financial profile with low gearing ratio, stable interest cover ratio and average cost of debt (Figures 4 & 5)
Little to no financial engineering which makes the REIT very transparent to analyses and easy to calculate the intrinsic value

What I Do Not Like About Sabana REIT:

Like all local industrial REITs, Sabana Industrial REIT have a “short” average land lease expiry which would result in a higher lease decay impact on the net asset value of the portfolio.
Previous REIT managers do not have a good track record pre-2017 and are known for their misalignment of interest with shareholders to a point where activist minority shareholders have to rally together in an attempt to fire the management team. That being said, on Aug 2023, Sabana REIT holders approved the removal of the manager with 57.5% voting in favour of internalization. The potential net impact this move may have on future performances is largely unknown and the process to set up an internal management team does not seem to be that straightforward.

Updates From Recent Performance (1H 2023)

General Comments:

On Aug 2023, Sabana REIT holders approved the removal of the manager with 57.5% voting in favour of internalization.

Positive Headwinds:

The occupancy rate has been recovering steadily and there's still more room to improve which may contribute to higher DPU in the future as they fill up the space
The second asset enhancement project in 1 Tuas Avenue 4 is expected to be completed by 1H 2024 which will contribute to top and bottom-line performances in FY 2024.

Negative Headwinds:

A vote to internalize management may result in higher borrowing costs due to the higher perceived risk of not having a strong sponsor/backing as well as the potential of breaching its current loan covenants.

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- Work In Progress -

Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).

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