Ratings agency S&P Global Ratings has withdrawn all its ratings of Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Reit) after downgrading its long-term corporate credit rating from investment grade to junk.
The withdrawal was done at the company's request, said S&P in a note yesterday.
S&P said it downgraded the Reit's rating from BBB- to BB+ with a stable outlook, as the Reit's balance sheet has "weakened on prolonged difficult industry conditions".
Its base-case expectation is that Sabana's ratio of funds from operations to debt will be 7 to 9 per cent for the next 12 months as negative rental reversions and a higher cost of borrowing reduce its profitability.
"Lumpy lease expires since November 2013 coincided with an industry downturn with declining capital values and expanding capitalisation rates in the industrial space in Singapore," said S&P. "Still, we recognise that the management has sound financial discipline whereby leverage, as defined by the ratio of total debt to total assets, has been consistently kept below 40 per cent since the Reit's listing."
The temporary peak of 41.7 per cent as at Dec 31 last year, arising from significant valuation loss, was quickly brought down below 40 per cent in the first quarter of this year, noted the report. It added that the downgrade also reflects Sabana's "limited headroom" under one of its covenants measured by total assets.
S&P noted that Sabana intends to pursue a built-to-suit transaction of about $25 million, to be completed by mid-2018, which will involve an equity portion because the Reit has little headroom to take on more debt under its leverage policy.
"The potential equity raising could reduce the Reit's debt," said S&P. "However, given Sabana's low unit prices (below its net asset value), still lumpy lease expires (more than 30 per cent in 2016), and subdued industry conditions, the timing and the amount of such equity raising are uncertain, in our view."
S&P added: "The stable outlook at the time of withdrawal reflected our view that Sabana would take creditor-friendly measures to preserve its balance sheet strength, such that the funds from operations to debt ratio would be above 7 per cent over the next 12 months."
Sabana Reit posted a 25.3 per cent drop in distribution per unit to 1.33 cents for the first quarter ended March 31, down from 1.78 cents a year ago. Distributable income fell 24.7 per cent to $9.77 million from $12.97 million previously.
Net property income shrank 18.4 per cent to $15.17 million, while gross revenue slid about 7 per cent to $23.61 million on the back of negative rental revisions, non-renewal of one master lease and higher property expenses.