In the past almost one year, Sabana Shariah Compliant Industrial REIT has received outsized attention despite its relatively modest size. This is partly due to the completion of NTP+, a new mall that will raise rental revenue, and partly due to the barrage of open letters from Quarz Capital which railed against its proposed merger with ESR-REIT — successfully as it so happened.
Subsequently, Quarz Capital started a campaign to remove Sabana REIT’s general mandate and its distribution reinvestment plan (DRP). As it happened, on April 27, unitholders voted by 61.76% to retain the general mandate and by 61.87% to keep the DRP in progress. The general mandate and DRP are ordinary resolutions requiring a simple majority.
Unitholders should want what is best for the REIT. A general mandate would enable the REIT to grow with accretive acquisitions if possible, thereby raising distributions per unit. Quarz Capital itself had at one point hoped that Sabana REIT’s DPU could grow by 30% in a year. As for the DRP, this is for long term investors who can raise their stakes without having to pay brokers’ fees and commissions.
Unwinding Quarz’s 9% stake
As an activist hedge fund, Quarz Capital is likely to be focused on returns. It has now amassed a 9% stake in Sabana REIT. How will this unwind? Sabana REIT is not as liquid as say Ascendas REIT, or Mapletree Logistics Trust or any of the larger industrial REITs. Yet, Quarz Capital needs to unwind its stake without hurting minority unitholders. To do this, it may need to find a buyer.
Interestingly, ARA Asset Management signed a memorandum of understanding to acquire a 50% stake in Dasin Retail Trust’s trustee-manager and 5% of Dasin Retail Trust itself. This would give ARA a further $2.5 billion in assets under management.
In a February report, DBS Group Research indicated that ARA’s valuation could be $5 billion, which is a premium to its last traded price as a private company of $2.75 billion. The wire services have reported that ARA is looking to re-list.
As a result, ARA appears to be interested in boosting its AUMs. What better way than to take a small stake in Sabana REIT and negotiate for a stake in its manager?
Surely Quarz Capital would be willing to sell its Sabana REIT stake now that it is in the money, including DPU and perhaps excluding DPU too, given that some units were acquired below 40 cents last year.
NTP+ triggers price rise
Sabana REIT is one of the best performers among the S-REITs, this year, up 18% year to date excluding DPU. Units in the REIT started to rise following an announcement on March 10 that its new mall, NTP+ had received its TOP.
“Our price started to rise after our announcement that NTP+ received its TOP,” Donald Han, CEO of Sabana REIT’s manager had said earlier. He indicated that NTP+’s yield on cost of $20 million is in double digits.
Rents at NTP+ are likely to be in the region of $8 psf per month to $10 psf pm. NTP+’s GFA is 43,000 sq ft, but as with retail malls, some 15% of that is likely to be common areas and so on. In addition, retail malls have higher occupancy costs than industrial property in general. Hence, annual rental uplift could be around $3.3 million to $3.4 million, assuming some outgoings in the form of utilities, cleaning and other expenses.
Once NTP+ is up and running, and its 43,000 sq ft of gross floor area can contribute to rental revenue, Han can turn his attention to 10 Changi South Street 2 which is across the road from Expo MRT, an interchange station. The property is now a warehouse with a cargo lift and is not built up to its allowable plot ratio. Its current GFA is 238,862 sq ft. The site is zoned industrial. Sabana REIT has the potential to add a further 100,000 sq ft of GFA, subject to regulations, and traffic flow.
Whatever the case, Han will have to think out of the box to get a double-digit yield on cost. Whatever concepts he thinks of would need to tap on the crowd that would normally visit Changi City Point with its discounted sports shops, and Expo. It may not be another car showroom, or a wholesale food concept, or even a decathlon, but something quite different with AEIs done while the warehouse remains occupied.
Over the years, Sabana REIT’s valuers have revalued its properties a lot more realistically with assumed rents absent the artificially high master lease rents when the REIT initially listed. Hence 10 Changi South Street 2, which was acquired at $54.2 million has been revalued down to $33.2 million. An AEI could lift that valuation.
