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Sabana REIT: Fundamental analysis.

Friday, November 26, 2010

Sabana REIT closed at $1.02 and touched a low of 97c at one point today. After the rather strong performance by MIT and GLP on debut not so long ago, the unenthusiastic response to Sabana REIT on its first day of trading by market participants was somewhat surprising. Let us do an analysis of the REIT and whether it is a good investment at the current price.

Sabana REIT has an aggregate leverage of 26.5% which is comfortable but bear in mind that a Shariah compliant REIT cannot lever beyond 35% while other REITs are quite comfortable levering to 45%. Its NAV per unit is 99c. So, it is trading at a slight premium to NAV and at 97c, the low of the day, it was only at a slight discount to NAV.

The total GFA of all its properties is 3,286,220 sq ft.  Its largest property which has a GFA of 810,710 sq ft has a remaining lease of 45 years. The rest of its properties have remaining leases of between 22 and 72 years. Three properties have remaining leases of 31 years or less and their combined GFA is 706,055 sq ft. Nothing irregular here. Although close to a quarter of its GFA would come to an end in 31 years or less, it does not seem worrisome at this point in time.

The REIT has an occupancy rate of near 100%. This is a good thing but it also means that there is little room to increase occupancy and revenue through renting out more space. 59.5% of its leases (by revenue) will expire in 2013 while the rest would expire in 2015. So, income should remain predictably stable till 2013.

The REIT will distribute 100% of its taxable income till 31 Dec 2012. Thereafter, at least 90% of taxable income will be distributed. Income distributions will be made quarterly to unitholders.

The estimated annualised DPU for 2011 is 8.63c and for 2012 is 8.67c. These represent yields of 8.22% and 8.25% respectively based on the IPO price of $1.05 per unit.

I believe that we have a fair offer here in Sabana REIT. Although I would rather invest in AIMS AMP Capital Industrial REIT which offers an annualised DPU of 2.08c for 2011 which would translate to a yield of 9.24% at a unit price of 22.5c, investing in Sabana REIT could provide some safety through diversification.

One thing that worries me is the lack of a track record of Sabana REIT's manager whereas AIMS is an old hand at managing REITs and Mr. George Wang's achievements are impressive. So, would I invest in Sabana REIT? If price weakens further, I might just buy some.

View prospectus here.

Related post:
Sabana REIT: IPO at $1.05/share.

16 comments:

Anonymous said...

The current yield based on its IPO pricing is from a 100% distribution. Which means the absolute value of its distribution will only go down from there. A maximum gearing of 35% also places a cap on its future growth (or risks in when interest rates are higher) in this current environment. Throw in a weak sponsor and lack of track record, it is quite a gamble!

Believe the only positive is the support it will have from the Islamic financiers... It'll be interesting to see how much that is "worth".

P

AK71 said...

Hi P,

I agree that seemingly there is little upside in store for unitholders of this REIT in the next 2 years. In Year 3, if everything remains as it is now, there could be a 10% reduction in DPU but this is by no means set in stone.

Of course, for future acquisitions, the REIT could raise funds through issuing rights or placing out new units since it has limited capacity to gear up further.

Having said this, I am not too excited about the properties which it has ROFR (right of first refusal) as their remaining leases are rather short with two of them having less than 10 years left, if I remember correctly.

I would not mind getting some at a price which would give me a distribution yield of more than 9% though. I believe that gives me a greater margin of safety. :)

Anonymous said...

Will this reit drop further with the price. me got a lot for it.

AK71 said...

Hi Anonymous,

That is a difficult question. :)

Valuation is a subjective exercise. At the current price, I think it is a fair offer but not a compelling one.

If price declines further, I might buy some. So, what price is that? Perhaps, when it offers a 9% yield which would mean a unit price of about 96c.

Technically, the charts are non-existent as the REIT is only 1 day old.

Will its price decline further in the near future? Your guess is as good as mine.

Could you include your name or initials in future comments? Thanks. :)

Anonymous said...

We Need to see how this reit trade for the next few days.



TN

AK71 said...

Hi TN,

For sure, only time will tell. :)

Anonymous said...

Saw this Reit stay around 0.97 and 0.975.Is it reach the minium.

TN.

AK71 said...

Hi TN,

If you are wondering if this counter has bottomed, there is no way I can tell you. However, I am not buying at this level. :)

Anonymous said...

Today it reach .96.

TN

AK71 said...

Hi TN,

I used Fibo lines to chart where the next supports might be in case 96c breaks.

93.5c might be a nice entry price and provides a greater margin of safety. ;p

No Luck Lim said...

I always hit the wrong boat at the wrong time. But with returns of about 9%, for year 2011 and 2012, i bought in 4 lots at 95cts today. Hope it will bear fruits in the coming few years ...

AK71 said...

Hi No Luck Lim,

At 95c, you have saved yourself 10c per unit compared to those who bought at IPO. It seems like an OK price to me, especially if you are happy with a 9% yield.

Fundamentally, I do not see how anyone could mess up this REIT in the next two years. Should be quite safe. :)

Technically, we could see further weakness in price but it could be quite limited.

Anonymous said...

Anyone can explain why Reit peformance quite bad recently ?

TN.

AK71 said...

Hi TN,

I suppose you are referring specifically to Sabana REIT?

0332 GMT [Dow Jones] Sabana REIT (M1GU.SG) ...... still struggling to make headway since dismal debut last Friday, with units consistently closing below S$1.05 IPO price every session. Sale of units in open market by substantial shareholder Moore Capital Management not helping sentiment, with fund trimming stake to 6.38% vs 7.80% yesterday. Shari'ah-compliant REIT's main draw remains its yield, now higher after recent price pullback at 8.9% based on yesterday's closing price vs 8.2% based on IPO price. Still, Kim Eng Securities analyst Anni Kum says challenges lie ahead for Sabana, with acquisition prospects tough given keen competition for industrial properties in Singapore, unattractive pipeline of assets from sponsor Freight Links (F01.SG); "two out of the three properties of Freight Links...are old and require redevelopment or additional investments." Orderbook quotes suggest price unlikely to clear S$1.00.

Anonymous said...

AK47 : Ya. it drop until .94. Not Sure it reach the minium yet. If it drop below .90. Can i say the yield will be higher.:)

TN

AK71 said...

Hi TN,

As its unit price falls, its yield goes up, for sure. :)

I do not think that it would fall below 90c but it could, of course. ;)

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