Internalisation comes with a cost
- Solid operating metrics overshadowed by c.S$5m in expenses relating to internalisation process
- Ongoing litigation with master tenant at 33/35 Penjuru Lane adds another layer of near-term uncertainty
- Dividend payout ratio cut to 90% in anticipation of more expenses to be incurred; FY23 DPU of 2.76 Scts
- Maintain FULLY VALUED with TP of S$0.30
FY23 revenues and NPI were up 17.9% and 3.2% y-o-y, respectively. In FY23, revenues surged to S$111.9m, marking a substantial 17.9% y-o-y increase. This strong growth can be attributed to consistently robust positive rental reversions and sustained stable occupancy rates. NPI also experienced a positive uptick, reaching S$55.0m, a 3.2% y-o-y improvement. However, this increase was partially tempered by elevated operating and utility costs.
It’s worth noting that revenues could have been even higher were it not for a S$2.0m impairment in accounts receivable related to the master tenant at 33/35 Penjuru Lane. Legal proceedings concerning this matter are still ongoing.
FY23 DPU of 2.76 Scts was 9.5% lower y-o-y due to retention of income. FY23 DPU would have matched FY22’s DPU of 3.05 Scts if not for the decision to retain 10% of income. With the 10% income retention, FY23 DPU settled at 2.76 Scts. The retention of income was a strategic move aimed at prudent capital management, considering the costs incurred and anticipated expenses associated with the internalisation process.
To date, a total of c.S$4.64m has been spent on activities related to the internalisation of the REIT. This includes S$1.37m for the EGM held on 7 August 2023 and S$3.27m in internalisation expenses incurred since that date.
Gearing remains at a healthy 34.3%. Despite the additional drawdown in loans to fund ongoing AEIs and refurbishments, SSREIT’s gearing stands at a healthy 34.3%. Furthermore, the all-in borrowing costs have remained stable at 3.89%. Currently, 76.3% of loans remain hedged to fixed rates for a weighted average term of 1.0 years.
In terms of financial planning, loans due in FY24 have already been successfully refinanced, ensuring financial stability. Notably, the next loan expiry is not anticipated until 4Q25.
12th consecutive quarter of positive rental reversions. In 4Q23, positive rental reversions persisted, recording an increase of 6.2%. This marked the 12th consecutive quarter of favourable reversions. The overall reversions for FY23 were exceptionally strong, reaching +16.6%. While positive rental reversions are anticipated to continue in FY24, there may be a moderation in the growth rate as businesses adopt a more cautious stance in response to the evolving macroeconomic outlook. Portfolio occupancy remained stable at 91.2% in 4Q23.
In FY24, c.16.3% or around 430,000sqft of leases are set to expire. It’s noteworthy that nearly half of these expiries in FY24 have either already been renewed or are currently in the lease documentation process.
Portfolio valuation recorded a 2.1% uplift. As of 31 December 2023, SSREIT’s portfolio valuation stood at S$903.9m, reflecting a 2.1% y-o-y increase. The upward trajectory in valuation can be attributed primarily to the successful completion of AEIs and property improvements, coupled with sustained robust rental growth.
It’s noteworthy that the underlying assumptions and cap rates employed by valuers remained stable throughout this valuation period.
Originating claims against tenant at 33/35 Penjuru Lane. SSREIT initiated legal proceedings against Kleio One-Solution, the master-tenant at 33/35 Penjuru Lane, by filing originating claims against it on 17 November 2023. The claims seek the possession of the premises and demand payment for outstanding fixed rent, land rent, property tax, and late payment interest, totalling c.S$2.1m.
The lease in question constitutes around 2.9% of SSREIT’s monthly rental income, and we estimate that income from the property contributes approximately 6.5%-7.5% of SSREIT’s DPU annually.
On 19 December, Kleio One-Solution acknowledged the arrears in its rent payments but countered with a claim, citing SSREIT’s alleged obligations under the lease. In response, on 28 December, SSREIT submitted its defence to the High Court. This filing clarified the mischaracterisation of the REIT’s obligations under the lease by the tenant and categorically denied the counterclaim in its entirety.
Internalisation of the REIT manager. On 21 December 2023, the manager received a letter from the Sabana Growth Internalisation Committee proposing an EGM with 12 resolutions aimed at directing the Trustee regarding the internalisation of the REIT manager. However, on 8 January 2024, the manager announced their decision not to convene the EGM, citing an inability to verify the Sabana Growth Internalisation Committee as a valid unitholder.
The committee has since submitted another requisition notice on 11 January 2024. This notice reiterated the request to convene an EGM and included the same 12 resolutions pertaining to the internalisation of the REIT manager.
Our view
Despite the robust operating performance and sustained positive rental reversions, we approach SSREIT with caution. The ongoing litigation with the master tenant at 33/35 Penjuru Lane, coupled with the uncertainties surrounding the internalisation of the manager, adds a layer of complexity to the REIT’s outlook.
The AEI at 1 Tuas Avenue 4 is progressing as planned, for completion in 1H24. However, the absence of pre-commitments for the property, despite multiple inquiries, raises concerns. Additionally, the ongoing internalisation process is expected to incur additional costs, potentially diluting income growth in FY24.
In our valuation of SSREIT, despite projecting higher revenues, we have factored in a lower dividend payout ratio of 90%. We are maintaining our FULLY VALUED recommendation on SSREIT due to prolonged uncertainties and increased expenses associated with the internalisation process. Consequently, our Target Price (TP) remains at S$0.30.