Sabana Industrial REIT (SGX: M1GU) is a Singapore-listed real estate investment trust with a diversified portfolio of 18 industrial properties valued at approximately S$915.9 million. The REIT has recently been navigating a challenging period despite reporting record revenue for FY2024. The REIT achieved its highest-ever gross revenue of S$113.3 million and a net property income of S$57.5 million, reflecting modest growth amid rising costs and elevated borrowing expenses.
However, these financial gains have been overshadowed by ongoing internalisation efforts to bring management in-house, efforts that have incurred hefty costs exceeding S$11 million and sparked controversy among unitholders. Activist investors and some unitholders have pushed for asset sales and questioned the prolonged internalisation process, citing concerns over rising debt leverage, increasing financing costs, and the REIT’s underperformance relative to peers.
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However on Monday this week, the REIT unit prices appreciated by more than 6% in 1 day.
Why did a REIT that has faced plenty of headwinds rally so much in a single day?
Digging deeper into the facts
While the unit price appreciation might have caught attention, for a REIT that has been sold down over the last few years, this sudden rally could be just a temporary blip.
However, looking at the trading volume on Monday, it is safe to say that the rally has tangible demand. So there could be underlying fundamentals at play, where insiders and speculators might have already made the first move, thus jacking up the unit price.
From a deduction point of view, the rally appears to hold some ground.
What could be the catalysts?
As there are no official news nor announcements at this point, retail investors can only make educated guesses about the rally.
Valuation wise, Sabana trades at a discount. Its latest price-to-book ratio is at 0.78x. Even though the 3-year price to book ratio has always been below 1.0x, and trades close to its 3-year mean of 0.75x, it looks outright cheap from that aspect.
Dividend yield wise, Sabana is also trading at 7.43% dividend yield. Purely from a valuation point of view, Sabana REIT looks enticing not only from a retail investor’s point of view, but potentially to other bigger REITs who are on a M&A or privatisation lookout.
A privatisation offer would immediately unlock value for Sabana, who has been trying hard to return value back to investors after voting and opting for an internal REIT manager by ousting out its predecessor REIT manager – Sabana Real Estate Investment Management (SREIM).
Are Sabana REIT’s financial solid?
While valuation of Sabana REIT looks enticing, one might want to take a closer look at its financials to grasp the REIT’s strength and weaknesses.
For its latest 1Q’25, Sabana REIT registered a +4.6% growth in gross revenue, achieving S$ 29.1 million. Net property income came in higher at +22% YoY, hitting S$ 16 million.
Financing costs also went up, increasing from S$ 3.6 million to S$ 3.8 million. But due to the higher net property income, total income available for distribution is higher at S$ 9.7 million. On a per unit basis, this translates to 0.86 cents per share.
From a net asset value perspective, there is no drastic change, albeit a $0.01 difference due to distributions paid in 1Q’25.
Capital management wise, the aggregate leverage is up by a mere 40 basis points to 37.8%, still a fair room away from the max 50% gearing. Interest coverage ratio is decent at 3.1x, while average financing cost is up 15 basis points, as interest rates remain elevated. To top that up, Sabana REIT’s assets are still unencumbered.
The only red flag, and a potentially big one, would be the S$ 75 million refinancing due in March’26 next year. Not to also forget that for the upcoming fiscal year, Sabana has quite a huge chunk of debt to refinance.
Judging from Sabana’s balance sheet, it shouldn’t be a huge hurdle. But this remains a key item for investors or investors-to-be to follow up.
Internalisation of the REIT Manager
Sabana REIT’s manager internalisation scenario was a rare and contentious episode in Singapore’s REIT sector, marked by a protracted struggle between activist investors, the incumbent external manager, and the REIT’s trustee. In August 2023, unit holders voted to remove the external manager and directed the trustee to set up a wholly owned internal manager – a move aimed at aligning management interests with unit holders and potentially delivering cost savings.
However, the process has been fraught with unexpected complexities and escalating costs. Activist investor Quarz Capital, which spearheaded the campaign, initially touted significant cost savings but later admitted its estimates were erroneous, and the internalisation has so far exceeded projected expenses.
Ultimately, while the internalisation is intended to foster better governance and value creation for unit holders, it has introduced new risks, regulatory requirements, and significant transitional costs, leaving the REIT’s future direction under close scrutiny by investors and regulators alike.
Potential other reasons for the rally?
The only other plausible reason I can think of is that there is a breakthrough in the internalisation of the REIT manager. However, given the complexity of the process, I really doubt this has been resolved, even though it has been more than 6 months since the EGM in November 2024.
Looking at the challenges being faced by the REIT, any potential surprises that would lift the unit price would be from the REIT manager internalisation, or the emergence of a white knight, potentially offering to buy out the REIT, based on the discount it currently trades at.
That said, it could also be a harmless mistaken trade triggered, as on Tuesday, unit prices corrected downwards.
Those who might want to punt can go through the potential scenarios tabled above. For me, I prefer to stay on the sideline for this one!
P.S. if you’re interested in REITs and want to build a dividend portfolio, join Chris at his next live webinar to learn from someone who has retired doing just that.
