DBS downgrades Sabana REIT to ‘fully valued’ after ‘watershed moment’

Felicia Tan
2-min read
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DBS Group Research has also lowered its target price to 30 cents from 48 cents previously.

DBS Group Research analysts Dale Lai and Derek Tan have downgraded their call on Sabana REIT M1GU to “fully valued” from “hold” previously after the REIT’s unitholders voted to internalize the REIT’s manager.

On Aug 7, Sabana REIT held an extraordinary general meeting (EGM) that saw its unitholders voting to remove its current manager, Sabana Real Estate Investment Management (SREIM).

Unitholders also voted in favour of the REIT’s trustee, HSBC Institutional Trust, to effect the internalisation of the REIT manager.

“While costs rationalisation and a more aligned management team with unitholders’ interest are mooted benefits, we believe that this is likely felt in the medium term. The current transactional phase could mean additional costs and resources which could add pressure to the returns of the REIT,” write Lai and Tan, who called the results of the EGM a “watershed moment”.

Amid the current uncertainties, the analysts have hiked their cost of equity assumptions, which resulted in a lowered target price of 30 cents from 48 cents previously.

“While yields are attractive at [over] 7.0% for the stock, near-term overhang on potential cost spikes and uncertainties around its refinancing are key areas to keep a close watch on,” say Lai and Tan.

At this juncture, the analysts note that the transition process may cast operational and financial uncertainties on the REIT, which could result in an overhang on its distributions per unit (DPUs). In particular, key data points to watch are the response from the REIT’s lenders – given the change in ownership – and a change in credit spreads when refinancing comes due.

“Our estimate is a 1% increase in interest rates could potentially cut DPUs by close to [around] 9%. In addition, questions will likely surround ESR Cayman stake in the REIT and could be an overhang for the stock should they relook their stake in the medium term,” the analysts write.

Units in Sabana REIT last closed at 40.5 cents before its trading halt on the morning of Aug 7.

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