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Sabana REIT: 2Q 2012 DPU 2.27c.

Thursday, July 19, 2012

When people asked me whether they should invest in AIMS AMP Capital Industrial REIT or Sabana REIT recently, I asked them what are they after? If they are after a higher yield in the immediate future, Sabana REIT is the obvious choice.



Sabana REIT has declared a DPU of 2.27c, just 0.01c higher than in the last quarter. Annualised, this gives us 9.08c. Buying units of the REIT at $1.00 a piece would give us a distribution yield of 9.08%. Sabana REIT is probably the only one in the S-REIT universe now that is offering a distribution yield in excess of 9%.

Gearing: 34.1%

NAV/unit: $1.04

Interest cover ratio: 5.6x

Occupancy: 98.4% to 100%.
(Total occupancy rate: 99.9%)

Remaining land leases (average): 39.7 years.



The REIT's management should be working on leases expiring in 2013 soon, if they have not started already. Given that 47.4% (down from 49.4% in January 2012) of leases expire in 2013, this is a top priority, in my opinion. Hopefully, we would then see positive rental reversions which would, in turn, improve DPUs.

They have signed a new 10+5 year master lease for 1 Tuas Avenue 4 which would now expire on 31 March 2022. I would like to see more of such effort to reduce lease expiry concentration in 2013 and, to a certain extent, 2015.

In the meantime, the REIT could probably make another two or three acquisitions if it gears up to 40%. This would be the fastest way to improve DPU.

The REIT will go XD on 25 July and its income distribution is payable on 29 August.

See presentation slides: here.

Related post:
Sabana REIT: 1Q 2012 DPU 2.26c.

22 comments:

JCK said...

AK

Thanks for the writeup

"that 47.4% of leases expire in 2013"
That indeed would be top priority!
Thats quite a big portion of lease expiry.
One would wonder how much of that % will they succeed in extending?

Its getting more difficult to get yields in excess of 9%.

One of my original criteria was companies having yields of at least 9% -+ 10% deviation.
Seems like its getting more difficult to achieve that.

AK71 said...

Hi JCK,

With industrial space supply in Singapore still rather tight at the moment, I am almost sure that the leases would be renewed but whether the asking rents could be raised and by how much would be pertinent questions.

So, the earlier the management addresses this matter, the better.

I am more concerned about the leases expiring in 2015 because by then, we would see much more industrial space completed and competing for tenants here.

With REIT's unit prices appreciating steadily, yield compression will continue to happen. Even with 7+% distribution yields and even if we take into consideration the leasehold nature of most properties here, it still beats leaving money dormant in a bank account.

REITs will gain in prominence in times of low interest rates and low growth (or even zero growth).

LCF said...

Hey AK

Regarding this "...effort to reduce lease expiry concentration in 2013 and, to a certain extent, 2015."

That means in ideal world, they should negotiate with tenants, so that in a REIT asset portfolio, the lease expiry dates for all properties are spread out, within any given year. THis is what you mean right? So in case tenants choose not to continue leasing, the rental income would not be affected too much on that year.

LCF

Jay said...

AK,

Another thoughtful posting on one of my favorite local REIT's.. Thanks!

I agree renewals this time round are probably not the main issue.. What I hope they will achieve is that they do have different tenures for the renewals so we dont have another 40% coming up in 2015 when market is potentially much softer than today. I remember reading that some industrial REIT's start incentivizing their sales teams to contract longer terms, hopefully Sabana manages to do so.. then this should be a stock to keep...
Jay

AK71 said...

Hi LCF,

The idea is not to have too many lease expiries in one year. This creates concentration risk. So, yes, smoothening out of lease expiries over time would be a good move.

Of course, this is, like you said, in an ideal world. We manage what we can and if we are a step closer to the ideal situation, so much the better. :)

AK71 said...

Hi Jay,

I would be quite happy with the REIT having very long term contracts like the one they clinched for 1 Tuas Avenue 4.

Of course, if they did manage to renew all the expiring leases in 2013 with longer term contracts which would then be expiring in the same year, say, 10 years down the road, we would still have concentration risk but at least the immediacy issue would be much diluted.

Sabana REIT is a very young REIT and, so, I agree that we have to continue to be rather more vigilant with it. Whether this is one for keeps like First REIT and AIMS AMP Capital Industrial REIT is too early to say, surely.

INVS 2.0 said...

Hi Ak71,

One thing I like Sabana over AIMS is that, it pays dividends much earlier and faster than the latter. :)

However, I would also get AIMS to balance up the risk with putting too much eggs in Sabana's basket.

AK71 said...

Hi INVS 2.0,

Yes, not putting all the eggs in one basket is prudent. :)

FoodieFC said...

Hi AK71

Although the industrial space supply in SG in tight. there is a factor we will have to watch out for.

The tightening of foreign quota and increasing cost to hire them. With this, coys might eventually move their manufacturing out. and less industrial space will be required.

Luckily Sabana has is into high tech too.

AK71 said...

Hi FoodieFC,

Yes, the tightening on the use of foreign labour here is likely to increase cost pressure on companies. It is a gradual change, thankfully, and affected companies should make use of the time to improve productivity.

A large proportion of Sabana REIT's portfolio is in high tech space. This is a reason why I decided to make my investment in the REIT more or less equal with my investment in AIMS AMP Capital Industrial REIT too. :)

SnOOpy168 said...

Just realised that the current price is near to it's IPO. I have a hunch that some retail investors who suffered the stock decline earlier may just off-load @ break-even $. Have this happened to other stocks before ?

AK71 said...

Hi SnOOpy168,

The desire to break even and exit a money losing position is a very powerful one. So, yes, I am sure some might do it.

However, anyone who got in at the REIT's IPO has technically made some money due to the consistent distributions. So, the desire to exit could be tempered by the desire to continue receiving the regular distributions. ;)

SnOOpy168 said...

seems that my gut feel was wrong. The prices are moving up & up.....

anyway, just came across a press release

http://sabana.listedcompany.com/newsroom/20120906_182941_M1GU_8210270BECAA18E648257A71002DFCE7.1.pdf

sounded very much like a bond issue due in 2017. Except that under Islamic financing, no interest can be charged. Just profit sharing, after deducting fees / commissions for the deal.

AK71 said...

Hi SnOOpy168,

For investors who already have a long position and holding for income, higher unit price is a bonus. :)

Thanks for sharing the link.

SnOOpy168 said...

I was flipping thru CNA and I spotted this

http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1227800/1/.html

About more companies moving to Iskandar. While I am unsure of whom the exact tenants are in AA & Sabana's list, i do believe that this cheaper rent cross the causeway will entice some companies to move.

Of course, pay peanuts get monkey, that crime and security were mentioned in the report. Not to mention the MY customs needs to be "taken care of" too.

So, how are our industry REITs operators reacting to this ?

AK71 said...

Hi SnOOpy168,

For sure, the cost of doing business is higher in Singapore. There will always be businesses with lower margins which have to seek lower costs in order to stay afloat. Some of these could be existing tenants of the REITs we are invested in. We cannot rule out the possibility.

How are the managers of industrial properties S-REITs reacting? I have no idea but, at the most basic, REIT managers have to take pro-active steps to renew leases and lengthen their tenures. Failing this, they have to look for new suitable tenants.

However, I believe that Singapore will always be the location of choice. There are many advantages of being here rather than across the causeway. Unless staying in Singapore is no longer a viable option, it is hard to imagine a big move away from Singapore.

SnOOpy168 said...

Next result announcement, 18 Oct (Fri) after market close.

JCK said...

REsults out! Looks pretty good!

Key highlights for 3Q 2012
1) Steady growth in gross revenue, DPU and value
• Gross revenue grew by 16.7% y-o-y to S$20.3m from S$17.4m.
• 3Q 2012 DPU increased by 9.3% year-on-year (“y-o-y”) to 2.34 cents from 2.14 cents in
3Q 2011.
• Unit price reached all-time high of S$1.145(1).
2) Portfolio updates
• Completed the acquisition of 23 Serangoon North Avenue 5 on 1 October 2012.
• Total asset under management now at approximately S$1.1 bn.
• High occupancy rate of 99.9% at portfolio level.
3) Capital management
• Completed refinancing with S$258.6m Additional Commodity Murabaha Facilities (“CMF”).
• Successfully launched S$80.0m landmark Convertible Sukuk.
• Average all-in financing cost(2) lowered from 4.8% p.a. in 3Q 2011 to 4.3% p.a..
• Weighted average tenor of debt increased to approximately 3.5 years as at 30 September
2012 from approximately 2.2 years as at 31 December 2011.

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_2B954698D4DE952948257A9B00358072/$file/Sabana_3QFY12_Results_Presentation.pdf?openelement

Seems they walloped their forecast Rev of $17.22m with actual of $20.32. Thats an impressive 17.9% outperformed!

BUT :( NET income only rose by 1.4% from $12.147 to $12.314.
Thats a downer.Financing costs seems to be the drag, from $2.5 to $4.18, 67% increase.

The costs have gone up from $4.39m to $6.84. Thats a 55% increase. this is something management will have to address.

Not sure what it means pg23- Lease expiry Profile by Gross Revenue.
But the 47.4% looks ominous!

JCK said...

AK or someone

Can anyone please verify this?

Found this in another forum

"Payout will drop to 94% payout next year"


"How did you know they will payout 94%? Did they mention somewhere in their policy (as I did not see it) ? "

"I think they mentioned it in their prospectus 2 years ago. (If I remember correctly)

The management forego their share of the distributions for the first 2 years."

AK71 said...

Hi JCK,

For sure, Sabana REIT has some challenges but its numbers look good. I will try to do an analysis soon.

Some REITs/Trusts with sponsors could see higher DPU in the initial years due to income distribution waiver by sponsors. However, I do not remember that to be the case with Sabana REIT which does not have a significant sponsor presence in the first instance.

As for payout ratio, S-REITs are required to pay a minimum of 90% of their distributable income to unit holders. So, it is possible that Sabana REIT could reduce their payout in the third year.

This does not mean that the REIT is worse off. It just means that less distributable income goes to unitholders. The fundamentals of the REIT do not change.

JCK said...

AK

Thanks for your response!

i just hope they manage the 47% expiry expediously.

Sabana is now my largest SREIT. :)

AK71 said...

Hi JCK,

It is possible that the REIT has a higher distribution yield because of this same lease concentration and expiry issue. Mr. Market's perception is that investing in Sabana REIT is somewhat riskier, therefore. So, a higher yield is demanded.

To mitigate this risk, it could be prudent for anyone already with a significant exposure not to add to their position. Of course, this is a question of risk appetite too. ;)

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