Sabana Reit explains S$54.7m decline in fair value of its assets

Singapore

MARKET weakness and uncertainty have driven down the fair value of Sabana Reit's investment properties, the manager said, after a regulatory query over the S$54.7 million decline in value reported in its half-year results.

Given the ongoing Covid-19 pandemic, "assumptions on market rent and market rent growth rate are generally lower, and vacancy assumptions are generally higher for most properties", it said in a late filing on Thursday.

The manager added that the properties with a significant fall in fair value included assets in Joo Koon Circle, Changi South Street 2, Penjuru Lane, Penjuru Road and Tuas Avenue 8. The Reit's portfolio of 18 properties in Singapore include industrial, warehouse and logistics assets.

The Singapore Exchange (SGX) also sought details on a net change in the fair value of financial derivatives, which the Reit had attributed mainly to "a change in the fair value of the profit rate swaps based on broker quotes recognised between the current and last reporting date".

The manager replied that a change in the fair value of profit rate swaps, based on broker quotes, was behind the wider loss of S$3.96 million in fair value of financial derivatives, at half-time.

The syariah-compliant Reit uses profit rate swaps to manage exposure to adverse changes in profit rates - the equivalent of interest rate swaps for conventional hedging instruments.

This arrangement, which is structured to meet Islamic finance requirements, involves swapping the profit rates on its borrowings from a floating-rate basis to a fixed-rate basis.

Sabana Reit disclosed that the notional amount of the profit rate swaps is S$200 million, with three counter-parties involved: United Overseas Bank, CIMB Bank and Malayan Banking Berhad.

The swaps are set to expire at different times between September 2020 and November 2023.

"The fair valuation change of the profit rate swaps are determined based on fair valuation reports from the banks on a monthly basis," the manager added in its explanation to the SGX.

"The fair value changes are recognised in the statement of total return and are non-tax deductible and have no impact on distributable income."

Separately, the manager told SGX that it has retained 55 per cent of its distributable income for rental waivers to tenants, and for working capital purposes.

The funds were set aside in the event of unforeseen circumstances and other uncertainties.

The manager said it plans to pay out the retained and unused first-half distributable income to Sabana Reit's own unit holders, as at a record date ahead of a proposed merger with ESR-Reit.

SGX had asked why the manager is retaining this sum, which comes up to about S$6.1 million, and whether it involves any adverse events, such as a failure by major tenants to make payments.

Units of Sabana Reit last shed half a Singapore cent, or 1.3 per cent, to S$0.38 on Thursday, before the announcement.

Separately, the manager told SGX that it has retained 55 per cent of its distributable income for rental waivers to tenants, and for working capital purposes.