Sabana REIT acquires 39 Ubi Road 1 for $32m

Sabana REIT made its maiden acquisition less than a year since its listing on November 2010. The new property at 39 Ubi Road 1 is a part 5/part 6-storey light industrial building, strategically located within the industrial cluster of Ubi Road, well connected to two major expressways – Pan-Island Expressway (PIE) and Kallang Paya Lebar Expressway (KPE) – and in close proximity to Macpherson MRT plying along the Circle Line.

The subject property has a remaining tenure of approximately 40.4 years, which is close to its current portfolio with a weighted average leasehold land lease of 40.6 years by gross floor area (GFA) as at 30 June 2011. Thus, the new addition has minor effect in lengthening the portfolio’s overall land lease.

The property was bought at valuation of $32m which also includes the extension works. Addition and alteration works are carried out on the existing building to add another 2-storey extension. The extension works will add a projected minimum GFA of 39,078 sq ft to the building’s existing GFA of approximately 96,487 sq ft. Post acquisition, aggregate GFA of the property assets will increase from 3.3 million sq ft to 3.4 million sq ft. On a portfolio segment
basis, general industrial will grow to 13% in percentage term. The transaction is anticipated to improve asset and tenant diversification to reduce concentration of income stream on any single asset or lease.

The purchase is on a sale and leaseback arrangement whereas a triple net master lease of the entire premises for a term of five years will be entered between both parties. The transaction will increase the weighted lease tenure of Sabana REIT’s portfolio and reduce its lease expiry concentration in 2013 and 2015.

The transaction was fully financed by debt and would translate to DPU growth. The gearing ratio is expected to increase to c.27.7% upon completion of acquisition. Based on leverage target of 40%, Sabana REIT has another c.$168m on the table for future acquisitions.

Valuation
Equity valuation is more compelling following the heavy sell-down across the global bourses due to the uncertainty in western countries as well as macro outlook. Based on previous closing price, our target price represents a 26% potential upside excluding the dividend yield. We have yet to factor in the acquisition into our model as details on the lease agreement are not available. Thus, we maintain our BUY recommendation with an unchanged target price of
$1.120.