Donald Han, CEO of Sabana Industrial REIT’s manager, sees Sabana REIT as a small oil tanker that has ambitions to grow into a big oil tanker. “I said in our 2018 AGM we want to grow into a big oil tanker and we should have all the levers for this.”
When Han joined the REIT’s manager as CEO in January 2018, occupancy was 85.5%. As at March 31 this year, occupancy stood at 92.6%. Aggregate leverage has fallen significantly since the turbulent months of 2017, when a bunch of retail unitholders requisitioned an EGM to remove the manager. From 43.2% as at end-Dec 2016, aggregate leverage fell to 32.4% as at end-Dec 2022. As at March 31 this year, aggregate leverage is at 33.1%.
In 2017, Sabana REIT had lost its general mandate, and its DPU recorded a sharp fall of more than 20% because management fees had to be paid in cash. Some 80% of DPU used to be paid in units. According to a statement in its FY2017 presentation, the DPU in 2017 was 3.31 cents. However, it would have been 3.56 cents if 80% of base fees had been paid in cash.
Interestingly, Keppel Pacific Oak US REIT’s manager announced that its distributable income in 1QFY2023 fell by 21.2%, also because it has changed to paying management fees in cash from paying its management fees in units.
At any rate, Sabana REIT’s portfolio appears to be on a firmer footing. In 2017, 40.3% of the portfolio by NLA was on master leases compared to just 14% in 1Q2023. While master leases are a source of stable income, they are sometimes used for financial engineering purposes, and they can also lead to a measure of concentration risk. REITs aim for a diversified tenant base to mitigate concentration risk.
On March 14, Glass Lewis recommended in a proxy paper that unitholders vote in favour of five resolutions during the AGM on April 25, including voting for the general mandate, the distribution reinvestment program and to vote in Elaine Lim as an independent director. Without the general mandate, Sabana REIT’s manager may not be able to implement its DRP. DRP is useful should the REIT’s manager identify an AEI, Glass Lewis had indicated.
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“In 2017 we lost our general mandate and I got it back in 2018,” Han recalls “I’ve never used it. We have never gone out for a placement. DRP helps me reduce my gearing. I am solidifying and strengthening the REIT. In the past, I’ve not used the general mandate except for DRP, and we’ve reduced the general mandate from 50% of (units in issue) to 20%.”
Sabana REIT announced it plans to redevelop 1 Tuas Avenue 4 into an ambient logistics asset. The cost is $20 million, and the REIT will make use of its revolving credit facility to finance the AEI.
In replies to questions from unitholders, Sabana REIT’s manager says on the back of the completion of NTP+ mall in March 2021, the FY2021 annualised NPI yield for NTP was 11.3%, and this further increased to 16.5% in FY2022.
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The initial period that Sabana REIT can operate NTP+ as a retail mall is seven years. “In theory we have a letter from URA that says NTP+ will continue to operate as commercial and we need to activate the third phase of New Tech Park (NTP) to continue to operate NTP+ as commercial,” Han says. This would comprise redeveloping some of NTP’s unused GFA.
In replies to SIAS, Sabana REIT’s manager says the Phase 3 AEI of NTP is underway, and the manager is in discussion with multi-government agencies for the proposed GFA intensification plan.
Lower utility bills
The increase in total utility costs of $11 million to $24 million was caused by higher electricity prices.
“In 2022, our gross revenue rose 15% y-o-y but our NPI was up only 2.6% because of utility costs. We wanted to fix this and we have made a commitment by entering into a decarbonisation solution with Keppel Infrastructure and installation of solar panels,” Han says.
Solar panels will be installed on the roofs of four properties, and the electricity generated will achieve 75% of the energy needs for the four properties.
According to Han, there are two business models. The user either deploys capital expenditure to install the solar panels and these solar panels can last for a number of years. For instance solar panels last for 10 years for residential properties
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“For us, Keppel Infrastructure will install the solar panels and be the operator. We will buy the green energy from them at a preferential rate which is a lot lower than brown energy,” Han says.
He declines to share numbers because the rate depends on how long or short the deployment is. “For the current model, we tag the contract with the land lease just in case we can optimise the plot ratio. This is so the installation does not have a future impact on the REIT,” Han says.
The solar panels will start to be in operation by the end of the year and should contribute to lower utility costs in 2024.
Interestingly, Sabana REIT was the top performer in unitholder returns based on the metrics in The Edge Singapore’s Centurion Club 2022, a category for listed companies with market capitalisation under $1 billion. Sabana REIT also made significant improvements in Mak Yuen Teen’s Governance Index for Trusts (GIFT) in 2022.
Occupancy, AEIs and lower utility costs are small steps that should raise DPU and will help Sabana REIT grow into a bigger REIT. Han has set 2025 to 2027 to get to $1 billion in AUM. Since Sabana REIT is likely to need a general mandate to grow, and achieve an even lower cost of capital, unitholders will get an opportunity to vote on whether they want their DPU and NAV to grow, and for their units to trade at better levels.
Sabana REIT has three large unitholders. When asked by SIAS how Sabana REIT’s manager intends to create long term unitholder value, the manager says it engages all its unitholders “regularly to help them better understand the REIT’s performance, strategic focus and priorities”. Such engagements allow the manager to understand unitholders’ views, the manager adds.
Sabana REIT’s AGM is on April 25, and Han may have some navigating to do as he steers his ship.
