Sabana Reit gives more details of profit rate swaps, plans to pay out unused retained distributable income

SABANA Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit) has entered into profit rate swaps to manage and limit exposure to adverse changes in profit rates, as an equivalent of interest rate swaps for conventional hedging instruments.

The manager clarified this in a filing on Thursday night, after the Singapore Exchange (SGX) flagged a net change in the fair value of financial derivatives in the Reit's half-year results.

The 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.

As Sabana Reit had disclosed that a change in the fair value of profit rate swaps, based on broker quotes, was behind the widening loss of S$3.96 million for the six months to June 30, SGX asked the manager for more details of these profit rate swaps.

In response, 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, which is also known as Maybank.

The various swaps expire at different times between September 2020 and November 2023.

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"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.

"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, as well as working capital purposes, in the event of unforeseen circumstances amid the ongoing novel coronavirus pandemic and other uncertainties.

It added that 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 of 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 closed down lower by half a Singapore cent, or 1.3 per cent, to S$0.38 on Thursday, before the announcement.