Sabana Industrial REIT announced a 7.4% y-o-y increase in distribution per unit (DPU) to 1.59 cents in 1H2022. Gross revenue for 1H2022 rose by 14.7% y-o-y to $44.9 million due to higher portfolio occupancy of 88.2% as Sabana REIT’s manager clinched a healthcare tenant for 30&32 Tuas Avenue 8 with a 10-year master lease. The total amount available for distribution for 1H2022 was $17.1 million, up 9.6% y-o-y. However property expenses rose by almost 33% y-o-y to $17.8 million in 1H2022.
Donald Han, CEO of Sabana REIT’s manager acknowledges that inflationary pressures and the impact on DPU are top of mind of investors whom he meets. “We hedge our electricity costs, and every time it comes to expiry, we have to [re-hedge]. There is a service charge component. Where the buffer is insufficient we increase our service charge. Service charge is the maintenance charge of the property and that component is enough to cover security services, landscaping, cleaning services etc and in some cases electricity,” Han explains.
In general, industrial REITs such as Sabana REIT have about 15% of its GFA as common areas where costs are borne by the REIT. “We have to sustain these costs and that will eat into the budget, no different from any other REIT,” Han says. “We are mindful that costs are going up. We have to do active property management such as energy audits and look into saving operating costs. It is understandable for landlords to adjust and look into service charge components,” he adds.
These inflationary pressures are likely to affect all landlords and hence most S-REITs.
To mitigate the impact of rising interest rates, Sabana REIT has used some of the cash that was not distributed due to a fair take-up of its distribution reinvestment plan (DRP), leading to a small drop in aggregate leverage to 33.4%. More notable though, was the dramatic rise in fixed rate debt from 66.6% as at end-Dec to 75.3% as at end-June. Cost of debt inched up to 3.35% as at end-June versus 3.14% as at end-Dec.
Sabana REIT - which gave up its shariah compliant status in October last year - changed a secured Islamic loan into an unsecured loan. “We entered into hedging arrangement with the bank and we had fixed the rate [for this loan]. However interest rates are rising. The unhedged portion was affected because SORA has risen by three times since 1Q2022, that's why the all-in borrowing cost has inched up,” explains Lim Wei Huang, CFO of Sabana REIT’s manager.
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Han also revealed that a 20bps rise in interest rates in a year would impact DPU by 0.01 cent (in a year), based on the unhedged portion of debt.
Whatever the case, since Han took charge of Sabana REIT in January 2018, 2Q2022 is the ninth quarter out of 10 quarters that rental reversions have been positive. Moreover, Sabana REIT has outperformed the Straits Times Index, iEdge S-REIT Index and the FTSE REIT Index in 1H2022.
Gradually, Han has implemented an AEI programme. The largest AEI was to carve out NTP+, a mall at New Tech Park.
The next major AEI is likely to be a 1 Tuas Ave 4, by converting it to a high-specification logistics facility, suitable for third-party logistics companies, including with the flexibility of cold storage in the property, and to be completed next year.
