Results First Take: 3Q23 Business Update – Consistent double-digit positive rental reversion
- SSREIT reported a 11th consecutive quarter of strong positive rental reversions of +16.8%
- Key positives: i) continued strong positive rental reversions, ii) robust leasing momentum that has significantly reduced lease expiries for the rest of the year, iii) gearing and borrowing costs remains very healthy
- What we are watching out for: i) slight dip in occupancies could indicate a slowdown in demand, ii) uncertainty around internalisation process of manager, which is expected to be a long-drawn process
- Maintained FULLY VALUED recommendation with TP of S$0.30, given the overhang arising from uncertainties surrounding the internalisation process
| Key operational data | 3Q2023 | 2Q2023 | % Change | 3Q2022 | % change |
| Portfolio occupancy (%) | 91.8% | 93.9% | -2.1ppt | 89.1% | +2.7ppt |
| WALE (years) | 3.1 | 2.8 | 0.3 | 2.7 | 0.4 |
| Rental Reversion | 16.8% | 27.1% | -10.3ppt | 10.2% | +6.6ppt |
| Aggregate Leverage | 33.8% | 32.5% | +1.3ppt | 33.7% | +0.1ppt |
| Interest Coverage Ratio | 3.4 | 3.5 | -0.1 | 3.9 | – |
| All-in cost of debt | 3.9% | 3.9% | 0.0ppt | 3.8% | +0.1ppt |
Source: Sabana REIT
What has happened?
Sabana REIT has released a healthy business update for the third quarter of 2023. Notably, their positive rental reversions have remained robust, marking the 11th consecutive quarter of such positive performance. While there was a slight 2.1 ppt. dip in portfolio occupancies on a q-o-q basis, primarily attributable to multi-tenanted assets, the signing and renewal of leases covering approximately 324,000 sqft. during the quarter were commendable. As a result, only around 2.9% of leases are set to expire for the remainder of the year, a significant reduction from the 17.7% seen in June 2023.
In terms of credit metrics, SSREIT’s aggregate leverage saw a modest increase of 1.3 ppt from the previous quarter, reaching 33.8%. This rise can be attributed to the additional drawdown on revolving facilities to fund AEIs. Despite this, all-in financing costs remained stable at approximately 3.9%, with roughly 78.5% of borrowings being hedged to fixed rates (a decrease from 82.2% in the previous quarter). Importantly, the REIT has secured a new 4-year loan facility to cover loans expiring in the FY24, effectively eliminating any refinancing requirements until the 4Q25. The AEI works at 1 Tuas Avenue 4 are making good progress, with a completion rate of approximately 45%, and they are on track for completion in the first half of 2024.
Our views
Sabana REIT continues to impress with its consistently strong positive rental reversions. The successful leasing of over 324,000 square feet during the quarter stands out, especially in light of concerns about a slowing economic growth in Singapore. Furthermore, SSREIT maintains a relatively low gearing level of 33.8% and steady borrowing costs, currently at 3.91%. This stability is largely attributed to its loans being denominated in Singapore Dollars, especially notable when compared to peers who face increasing lending rates due to foreign currency denominated loans.
However, our outlook remains cautious, primarily due to the ongoing process of internalising the manager. Recent updates from the Trustee suggest that the complexity and unprecedented nature of this internalisation process are likely to extend over at least 12 months. Therefore, we maintain our FULLY VALUED recommendation with a TP of S$0.30, considering the lingering uncertainties surrounding the internalisation process.