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Sabana REIT: Convertible Sukuk.

Saturday, September 22, 2012

Some time back, I wrote about how perpetual bonds could be a good thing for REITs if they could use the funds raised to acquire yield accretive properties. Imagine borrowing at a lower interest rate to invest in a property with a NPI yield higher than the cost of debt. This is good news for existing unitholders.



Sabana REIT has announced a Convertible Sukuk which will raise S$80m. What is Sukuk? The easiest way to understand it is to think of it as an Islamic Bond. So, a Convertible Sukuk is a Convertible Bond.

The Sukuk will carry a profit rate of 4.5% and are due in September 2012. If the conversion to new units takes place, there will be 67,040,979 new units issued (about 10.5% of all units currently in issue).

Read announcement: here.

Sukuk holders could exercise the option to convert to new units after 9 November 2012. The initial conversion price is $1.1933 per unit. This is some 5.6% higher than the closing price of $1.13 in the last session.

If my understanding is correct, Sukuk differ from conventional bonds in that they do not take interest payment but, instead, they will take partial ownership of the business or assets. This is why the coupon of 4.5% is referred to as profit rate. Interesting.

Read announcement: here.

Property to be purchased:
23 Serangoon North Avenue 5.

Remaining land lease: 44.2 years

Purchase price: S$61.0m

Read about the property to be acquired: here.

I feel that the cost of debt at 4.5% per annum is somewhat pricey but Sabana REIT is a smallish outfit and the higher profit rate is to compensate for perceived higher risk, I suppose. It is similar to what Saizen REIT pays for some of its bank loans, for example. So, no big issue here.

I am not able to find information on the NPI which 23 Serangoon North Avenue 5 will generate for the REIT but I am assuming that it is yield accretive as announced by the manager. So, the NPI yield should be much higher than the cost of debt of 4.5% as the REIT's current portfolio has an average NPI yield of 7.3%. The purchase should be DPU accretive as well.

If the Convertible Sukuk are all converted to new units in the REIT, there will be a dilutive effect as they represent some 10.5% of the total units in issue now. However, the benefit is that they become equity in the REIT and not debt. This will, then, have a benign effect on gearing.

Do we stay invested and take the good with the bad or do we take our money elsewhere?

Related post:
Sabana REIT: 2Q 2012 DPU 2.27c.

42 comments:

Ah John said...

Market may not turn around soon, as near zero interest rate till 2015. So stay for a while? At least, no better alternatives so far.

AK71 said...

Hi Ah John,

My thoughts are along similar lines. If I should divest, where would I put the money? All things considered, I would keep the status quo. :)

tapiocaflash said...

Hi Ak71,

Do you think it makes sense to make the conversion price higher than the market price? As the conversion date (Nov) is not too far away, is the management assuming unit price will appreciate above the conversion price (we have to take into account the 10% or so dilutive effect, right?) to make it attractive for people to convert? If we don't convert, we will get 4.5% yield, would it be better if we invest the money back to the mother fund and get higher yield (the new to be acquired property will be DPU accreditive but might be cancelled off by unit dilution)? Could you please share your view?

goldmansion said...

Hi AK,
What is your take on perpetual securities (MTN)? Examples are:-
1. PCRT - 6.375%
2. Mapletree Log. trust - 5.375%
3. EZRA - 8.75%
4. Olam - 5.75%
5. Nobel - 6.75%
For income investors are these instruments worth investing?
Disadvantages are minimum $250000,illiquid,payout can be deferred and no capital growth.

FoodieFC said...

Cheam!!!

AK71 said...

Hi tapiocaflash,

Well, it is the norm that the conversion price is always higher than the current market price. In fact, they are usually much higher. :)

Bonds are paid a guaranteed coupon. They are perceived to be lower risk in nature.

The Convertible Sukuk gives the holders the option of conversion to new units in the REIT at a pretermined price. So, the Sukuk holders could exercise this option if the REIT's unit price should rise above the conversion price in future. Until then, they would enjoy a 4.5% "profit rate", more or less guaranteed.

An investor's risk appetite would determine if he prefers the Sukuk or buying units in the REIT at the current unit price. :)

AK71 said...

Hi goldmansion,

I believe that perpetuals have a purpose and they are targetted at a certain group of people. They are the people with extremely deep pockets. They are not for the mass market affluent like me. ;)

I wrote a piece several moons ago:
Perpetual bonds: Good or bad?

AK71 said...

Hi FoodieFC,

Haha.. Indeed! However, it is not too cheem. We only need a Bachelor's Degree in Cheemology to work this out. Any cheemer, I would not be able to work it out either. ;p

inquisit0 said...

Hi AK71,

May I ask how to subscribe for this sort of bonds?

Do I have to be invested in Sabana to buy this?

Or anyone can just buy it?

AK71 said...

Hi inquisit0,

The issue has been fully placed to institutional investors and accredited investors.

Read:
Who is an accredited investor in Singapore?

tapiocaflash said...

Hi AK71, thank you for your enlightenment! So this is for accredited investors only - means it's not for me. ;)

AK71 said...

Hi tapiocaflash,

You are welcome. Indeed, it is not for most of us. No loss. ;)

inquisit0 said...

Thanks for your reply.

May I ask, if you don't have enough time to monitor the market, the best thing to do is to buy REITs right and just collect dividends?

No point chasing after growth stocks like commodities?

AK71 said...

Hi inquisit0,

If we choose to invest in the stock market, we should find some time to track the performance of our investments. We should never assume that any investment is inherently safe, not even blue chip companies. ;)

Marco said...

Will the acquisition boost the DPU to >10% growth as compared to current DPU?

AK71 said...

Hi Marco,

Very unlikely. :)

Off the top of my head, the REIT's total assets under management are valued at slightly more than S$1 billion. The portfolio has a NPI yield of about 7.3%.

This acquistion is worth $61 million only. Even if its NPI yield is 9%, we would not see the REIT's DPU bumping up 10%. We also have to remember the 4.5% profit rate payable to the Sukuk holders as most of the money raised would go to funding the acquisition.

K-Enterprises said...

Good Day AK71,

Sidetrack abit ah. May I ask whether staying 50% invested at anytime is a good strategy? Which means balancing one's portfolio to always stay 50% invested.

Cheers

AK71 said...

Hi Kelvin,

I feel that it is always good to have a war chest ready for those times when Mr. Market goes into a depression. How big the war chest should be is really up to the individual.

50% is a figure that I am comfortable with but it could just as well be 70% or 30% for another person.

To be honest, I have been more than 50% invested for some time now. ;)

K-Enterprises said...

Hi AK71,

Thanks for you advice! I'm heavy in REITS but also in Equities at the current moment. Have you ever considered venture corp as a dividend play? It has quite a good track record in paying good dividends.

Cheers

AK71 said...

Hi Kelvin,

I should not wander out of my circle of competence (too often). ;p

I have heard good things about Venture Corp and will let people who understand its business invest in it.

JCK said...

Phillip Capital on Sabana

http://www.remisiers.org/cms_images/research/Oct01-Oct05_2012/sabana100312.pdf

AK71 said...

Hi JCK,

Yes, I read this. Good stuff, isn't it? Good that moved in early. ;)

JCK said...

i started with AIMSCAP and Sabana.
Sabana is now my biggest SREITs holdings, mainly because of the yields....but that is compressing fast!

How i wished AIMsCAP was my biggest! :)

AK71 said...

Hi JCK,

AIMS AMP Capital Industrial REIT and Sabana REIT are almost equally weighted in my portfolio. However, with the former's unit price having appreciated so much, I wonder if I shouldn't have balanced their weighting a year ago. Hindsight is a perfect thing. ;)

These two REITs account for more than half of my annual passive income from S-REITs. If their distribution yields continue to be compressed, I might have to think of living without their contributions.

Kim said...

Hi AK
I have bought some sabana at $1.145 yesterday.
Do you think is a right move?

AK71 said...

Hi Kim,

Well, if you are looking for a distribution yield of almost 8%, then, why not? :)

Sceptics are looking on in disbelief as the unit price of AIMS AMP Capital Industrial REIT keeps making new highs. Some say it is irrational. Well, Mr. Market is not known for being rational.

Ascendas REIT's distribution yield is about 5.8%. Could we see the distribution yields of AIMS AMP Capital Industrial REIT and Sabana REIT compressing to 6%? That would mean a unit price of $1.90 for the former and $1.50 for the latter. Dare I hope? ;p

Kim said...

Hi AK
Thanks for the advice.
I have sold off AIMS after the consolidation and during the spate of bad news coming out from europe, at a slight lose....so sad now the unit price kept moving up now.
Can I know whay do your mean when u said compressing yield? Let say if u have bought sabana now with annual yield of 8%, and if u did not sell it but hold it for passive income, does the compressing yield per se has any effect on you?
And AK, another question, with the issuance of convertible sukuk, the dpu will likely to drop and I can't expect a yield of 8% anymore with the price I have just bought in?
And lastly AK, if u will to choose between AIMS and sabana- which would you go for??

AK71 said...

Hi Kim,

I am sorry to hear that you sold off your investment in AIMS AMP Capital Industrial REIT at a loss. :(

A REIT trading at a unit price of, say, $1 and with a DPU of, say, 10c, would have a distribution yield of 10%. If the unit price were to go to $1.20 and its DPU stayed at 10c, the distribution yield would compress to 8.33%, for example.

In terms of income, compressing yield has no effect on someone who bought in at $1. However, in terms of valuation, as price goes higher to $1.20, everything else remaining constant, it would become more expensive to hold on.

I do not believe that the convertible sukuk issued by Sabana REIT would cause a decline in DPU. DPU would probably improve slightly. You might want to read this blog post again to see why. Third paragraph from the end of the post.

I like both AIMS AMP Capital Industrial REIT and Sabana REIT and I kept blogging about why they were really undervalued and great investments for income. I don't think you see me blogging about them as much in the same vein anymore. That does not mean they are not rewarding investments for income anymore, just not as rewarding as before.

Kim said...

Hi AK
Errhh....I don't understand the part when u said when valuation goes up and everything remain constant, it then become too expensive to hold. How come it has become too expensive to hold lei? Should instead be more happy when unit price appreciate ma...
Another thing, both AIMS and Sabana are industial reits. And if I am going for income investment, It is advisable and also a better choice to invest in these 2 reits only...in order to generate a higher yield? I am also already vested in saizen..

AK71 said...

Hi Kim,

I believe units of Saizen REIT to be undervalued even now. They should be worth more. Well, all in good time. :)

Should you invest only in AIMS AMP Capital Industrial REIT and Sabana REIT if you are investing in industrial S-REITs for income? I believe one should invest in undervalued candidates. However, they are harder to find these days. I am also invested in Cache Logistics Trust and Cambridge Industrial Trust at lower prices.

As unit prices increase without a corresponding increase in DPU, distribution yields get compressed and it is, thus, more expensive to hold on. Why?

We should not look at distribution yield on our cost price only. We should always look at distribution yields based on the current market price.

Example, $1 unit price with a DPU of 10c gives a yield of 10%. If unit price rose to $2 and DPU stayed at 10c (i.e. everything else remaining constant), the yield reduced to 5%. Therefore, $2 is more expensive than $1. If the DPU rose to 20c as unit price rose to $2, then, $2 is not more expensive than $1.

When an investment at current market price is yielding a lower return, it becomes more expensive. As investors, we want to buy undervalued counters and sell overvalued counters.

I hope I make sense as it has been a long day and I am not sure if I am at 100%. :)

Kim said...

Hi AK
Thank u very much for your quick response despite your busy day and tiredness...reali bery touch:)
I now understand when u said based on current market price.
And ya I know u are reali tired based on your reply second para first sentence....hee...hee
So AK AIMS AMP based on current market price is not considered undervalued?
Btw, I last bought Saizen at $0.17:(
Have a good rest AK. Good nite.

AK71 said...

Hi Kim,

Oops, something wrong with the first sentence in the second paragraph? I must be too tired. I still can't spot what is wrong.

I believe AIMS AMP Capital Industrial REIT is almost fairly valued but valuation is subjective. Don't listen to me.

I suppose you didn't buy any Saizen REIT as its unit price went below 13c when its warrants expired earlier in the year. It's OK, the stock market will always be there. There will be other times and other investments.

Good night. :)

Kim said...

Hi AK
Sorrie is my mistake I had misread it...my apology:)
Hmmm...actually I deciding between FIRST and AIMS AMP. Don't know which to go for.
And yes I did not add any position when saizen went down to $0.13. Very scare ma tat time. Maybe shld consider now.
Btw I also bought some marco polo hee hee...after reading your post:)
Good the night

AK71 said...

Hi Kim,

Ah, First REIT was one of my first loves. Haha.. ;)

Now, I feel that First REIT is fairly valued. Some might even argue that the valuation is a bit rich.

There were two occassions Saizen REIT went to under 13c in recent times, once after the earthquake last year and once when its warrants expired this year. I did not add to my position last year at 13c either but this year's event had greater clarity. So, I added aggressively. :)

Marco Polo Marine? Haha.. Yes, an undervalued counter. Good luck to us all.

Kim said...

Hi AK
when u said tat a counter is fairly value...means is still a good buy? Ya FIRST unit price really appreciated a lot recently...so also scare to enter now actually.
Btw yout idiol Marc Fraber (hope I spell it correctly) said tat the market wil drop by said 20% in 6 to 9 months time fr now.
Hence do u think it is safe to still buy REIT counters such as FIRST, sabana or even AIMS AMP at this present moment?
Actually in a dilemma, don't know to actually wait for market to drop and then enter or keep the money and lose earning the dividend and ya...though I know need to keep some opportinity fund...

AK71 said...

Hi Kim,

Well, when something is fairly valued, I am not as enthusiastic about buying compared to when it was undervalued. It is like buying at full price instead of buying at a discount. Of course, that does not mean that price could not continue rising, making the thing overvalued. ;)

Yes, Marc Faber thinks that we could get into equities cheaper sometime next year. So, keeping a war chest ready is a good idea.

As much as I am in awe of Marc, he is not God. He is not omniscient. He does not have all the answers. So, I remain partially invested. If the correction comes, I will buy more. If it does not come, I do not lose out. I have blogged about this approach from time to time. :)

Ah John said...

Market is really hard to predict, so don't try to predict but watch the valuation level. At this point, I totally agree with AK's approach.

Kim said...

Hi AK
Thank you for answering my doubt.
Look like undervalued S- REIT now is only Saizen?

AK71 said...

Hi Ah John,

Hey, I am glad we share the same approach. :)

AK71 said...

Hi Kim,

Saizen REIT is undervalued and you would know why I think so if you read my more recent blog posts on the REIT. :)

As for whether it is the only undervalued S-REIT, I really cannot say because I have not looked at all S-REITs in detail.

Kim said...

Hi AK
Thank u very much.
Will read that up:)

AK71 said...

Hi Kim,

You are welcome. :)

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