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Sabana REIT: 3Q 2013 results and outlook.

Thursday, October 17, 2013


Sabana REIT has announced a DPU of 2.38c which is slightly higher, year on year, but slightly lower, quarter on quarter. Some other numbers:

NAV/unit: $1.06
Aggregate leverage: 37.5%
Interest cover ratio: 5.0x

The recent decision by Sabana REIT to purchase a half vacant property from AMD generated quite a bit of concern. Although the management of the REIT suggested that they are quite confident that they would be able to find tenants to fill up the space, it remains to be seen if they could deliver.

Well, you know what they say about how it never rains but it pours? It now seems that Sabana REIT's management will have more vacant space to deal with come 25 November 2013. This is because 4 of the expiring Master Leases will not be renewed.


Now, before we go into a hysteria, the vacant space represents only 6.6% of the REIT's NLA.

As investors for income, we are really concerned with how income distributions could be impacted by all these. Realistically, we have to expect some downward revision.

Taking the DPU of 0.18c from 24 Sep to 30 Sep 13 as a guide, I estimate a DPU of 2.16c for 4Q 2013. This is a 10% reduction from 2.38c for 3Q 2013.

There is nothing rigorous in this estimate. It really is just 0.18c x 12 weeks.

If I were to instil a bit more rigor in this non-rigorous exercise, I would say the DPU could be closer to 0.18c x 7weeks + 0.168c x 5 weeks = 2.1c. This is to account for the loss of income from the 6.6% of NLA vacated through the non renewal of the 4 Master Leases mentioned earlier.

Based on the closing price of $1.10 per unit, this gives us a distribution yield of just 7.64% which brings us closer to the distribution yield offered by AIMS AMP Capital Industrial REIT currently. It seems that Mr. Market is quite efficient. Does this mean that Mr. Market will not go into a manic depression tomorrow? Your guess is as good as mine.

There is a chance that Sabana REIT could manage some positive rental reversions with the sub-tenants and command a higher psf rental for the vacated space in 2014 relative to what the Master Leases were paying. If we are level headed, we will realise that as long as Sabana REIT achieves higher occupancy again, DPU will improve from my back of the envelope estimate. While there exist a chance that Sabana REIT might not achieve higher occupancy again, this probability is rather low.

At the current unit price of $1.10, I believe that Mr. Market has priced in the negatives. If there should be a 10% or so decline in unit price, I would consider it a mispricing which would give interested investors an opportunity to buy in for an attractive yield of about 8.5% with a possibility of some upside in 2014 thrown in.

See presentation slides: here.

Related post:
Sabana REIT: 2Q 2013 results.

27 comments:

SOLIDCORE said...

Hi AK,

Was reading and thinking on a separate idea. Was wondering if you could shed some light on it. I also glady welcome any other reader to throw me a ball or two for some general thinking.

Its regarding UOBKH's YieldMax facility. I was reading it up and wondering if one with a decent risk appetite could effectively increase their yield to truly maximize their passive income portfolio?

Eg, Using their portfolio designer, I managed to get 16.17% returns from CLT instead of the current 7.3%.

To avoid a margin call, one could for example.
1. Have $20,000 cash on hand.
2. Invest $10,000 into the YieldMax account. Have $10,000 cash on hand as emergency for home use and just in case a margin call is activated.
3. Yield is 16%, as based on my above prior example.

If one is only going for yield, without a care for paper loss/ gains, would you suggest one to for such margin trading ideas?

Was thinking that this could be a good idea for any passive income investor but in my need to generate high yields in this low interest environment(unfortunately, greed as well), I find myself blinded to potential pitfalls which I'm sure there are. Could anyone knock some sense into me?

Cheers

AK71 said...

Hi Solidcore,

Ah, margin. It is a no-no for me.

I want to keep things simple and be able to sleep better at night.

In the GFC, Suntec REIT crashed from a lofty $2.00 to just $0.50. Imagine the monstrosity of a margin call that might have been for some people.

Of course, it is your call. :)

SOLIDCORE said...

Hi AK,

That's a very fair and good example of how things can go disastrously wrong.

Perhaps then, when it is at 50cents (hypothetical bottom), then margin might be a possible idea. With the current still rather high of REITS, the opportunity is one of more dangers than rewards.

:)

AK71 said...

Hi Solidcore,

Those who bought Suntec REIT at 50c or so would be enjoying a distribution yield of near 20% per annum. Enough lah. Don't be greedy. ;p

boonchin.ng said...

Suntec REIT @ 50c, hope I got luck and dare to buy in the next crisis :)

sillyinvestor said...

Below is what I posted on my blog, I am vested and biased, and will look for good points... read at your own peril =P

---------

Sabana’s has just added a few items that will displeased investors.

1) QoQ distribution fall

2) Only 1 master lease to be renewed. Are there is no news which of the five properties are renewed.

My thoughts:

1) I still believe the 233058sft of NLA freed up are existing space.

When the Reit IPO, the NLA is 2636560 sq ft, but sub-tenants increased from 92 to 99 in 2 quarters. Where does the 7 tenants get the space?

When Sabana went on acquisitions spree in 2011, the 5 new buildings added 30 sub tenants, and 1 quarter later, the number of sub-tenants further increased by 10 while the NLA stay constant at 3165643 sq ft. Where does the 17 tenants find the space?

1 master tenant will be renewed, and the NLA freed up is only reduced by 7000 square feet, when the smallest building has about 83K GFA.

Lastly, there is no fall in the number of sub-tenants when the figure on NLA freed up is proposed.

2) Lorong Chuan and 200 Pandan have the highest number of sub-tenants, 27 and 14 from IPO prospectus, but has most probably increased the number of sub-tenants, and these 2 buildings has no rental revision clause built into it. The master-tenant should be getting a good deal, why have they not renewed the master lease? There is only 2 possibilities. One: Sabana’s terms are too harsh, and the cost savings from reverting back to single tenant might make more sense. Two: They intend to move out after 25 Nov. If it is situation two, then impact on distribution will be significant, and it will also mean that Sabana’s management is downright dishonest. With only slightly more than 1 month to go before 25 November, Sabana would have gotten the news of non-renewal by their master tenant. No price will be low enough to justify such sneaky management style. But if its situation 1, then maybe we could see some rental revision going forward.

I would stay put with Sabana for the time being. I will need 1 more quarter to know if Sabana is really a rotten apple, or if it is a apple of lower quality, but still edible.

----------------------

My guess is that 2A kallang way is the building being renewed, it is a single tenant master lease, and the HQ for fong Tat group, which is also the "showroom" for motor parts, I doubt they will move unless left with no choice

Cory said...

Reit prices can be considered cheap in the future if the inflation goes up and drive higher rental income or Reit prices can be high if the current yield comes in lowerer. One thing is true, inflation will be there creeping to all our life daily.

AK71 said...

Hi boonchin,

It really highlights the importance of having a war chest ready. Even so, how long could our war chest last?

I accumulated a large position in Suntec REIT at $1 and lower in the GFC but I didn't buy any at 50c. There were simply too many stocks we could buy then at rock bottom prices. -.-"

AK71 said...

Hi Mike,

Thanks for sharing your analysis which provides us insights from a different angle. I like your apple analogy. :)

In terms of transparency, my impression is that AIMS AMP Capital Industrial REIT ranks higher compared to Sabana REIT. This could hurt the unit price of Sabana REIT, if perpetuated. In fact, I believe Sabana REIT's unit price has underperformed in part due to this too.

Having said this, as long as an investment meets my objectives, I will keep it.

AK71 said...

Hi Cory,

Inflation is never going away but we could have a few years of deflation. It won't be anything surprising.

Of course, fingers crossed that we won't get into a decade or two of deflation like what Japan went through.

What I worry about is stagflation. This would really be a nightmare. This could hurt income as prices stay persistently high through prolonged economic malaise.

Cory said...

Rising prices and high unemployment is scary. But is stagflation bad for Reits ?

AK71 said...

Hi Cory,

Well, when there is economic malaise, we can expect demand for commercial space to decline. Rental will either stagnate or decline. I don't think REITs will be spared.

When we think stagflation, we think of rising costs of doing business and high unemployment. Real estate prices would naturally suffer too.

In such a situation, I think only certain real assets will do well. These would be things people cannot do without.

sillyinvestor said...

HI Ak, a reply from Sabana's IR

It's confirmed. The lease renewed in kallang way, the space freed up is due to MASTER LEASEE MOVING OUT, not existing space, my hypothesis is wrong.

But the NLA will not increase further. See below for reply from Sabana.

----------

Dear XX

Thank you for your email. Please see our responses to your questions in brackets below. Thank you for your support for Sabana REIT and please let me know if you have more questions.

Kind Regards
Grace Chen

-----Original Message-----
From: Mike Ng [mailto:mrngjk@gmail.com]
Sent: Friday, 18 October, 2013 10:42 AM
To: Grace Chen
Cc: Enquiry; Bobby Tay
Subject: Renewal of leases

Dear Bobby and Grace,

Congratulations to the successful completion of shares placement and the acquisition of 508 Chai CHee.

I refer to your 3q results release yesterday, I hope u can answer some of my questions.

1) which master lease, specifically is being renewed? And what is the rental revision terms like? [ Master lease at 3 Kallang Way 2A is being renewed at a slightly higher rate. ]

2) the 233058 sq feet of NLA free up after 25 November, is it due to tenants moving out or is it the existing vacant space of the master leases yet to be leased? [ The 233,058 sq ft comprises primarily space to be returned to Sabana REIT by existing master tenants who decide not to renew their master lease. ]

3) After 25 November, any of your former master lessee moving out, and not renewing the lease under multi-tenant terms. If they are indeed moving out, does your 233058 sq ft NLA inclusive of those? [ Please see reply to question 2 above. ]

4) There are 2 single tenant building, ( from prospectus), 2A kallang way and 8 commonwealth lane, given that either 1 will not be renewing the master lease, it means some uncomfortable possibilities. [ Please see reply to question 2 above. ]
1) they Are moving out. Back to qn3
2) there are plenty of non-utilized space and they wanted a smaller space for savings.

To prevent too much unnecessary speculation among the investing community, perhaps u can help provide some details. I believe non-renewal of anchor tenants is material information.

----------

Their investor relation is doing a good job though.

AK71 said...

Hi Mike,

Thanks for sharing this. Much appreciated. :)

I am glad that their IR department has set your mind at ease.

Well, it seems that Mr. Market is not too bothered by the bad news either.

INVS 2.0 said...

Sabana and AIMS are always brotherhood side by side when comes to DPUs. :)

I am keeping a close watch on Sabana and its possible downward trend in its price.

AK71 said...

Hi INVS 2.0,

It does seem to me that the management of AIMS AMP Capital Industrial REIT is doing a better job of growing value for unitholders. This could in part be due to the fact that George Wang has a substantial interest in the REIT himself.

Sabana REIT's CEO reduced his stake in the REIT to zero not too long ago and although insider selling is not as important an indicator (according to Peter Lynch), it does mean that there is less likelihood of the CEO's interests being aligned with unitholders'.

Having said this, the way performance bonus is determined in Sabana REIT provides a safeguard to unitholders.

As Sabana REIT still meets my objective as an investor for income, I will stay invested and depending on how Mr. Market behaves, there could be opportunities to increase or reduce exposure to the REIT.

Fli Fli said...

Hi AK!
I'm either being meticulous or pedantic. But I did some "rigorous" calculation of my own which arrived at a slightly more optimistic outlook.

Your calculation is off by about 8% or 1/12 as you calculated based on 12 weeks. It should be 13 weeks. One year is 52 weeks, divided by 4 quarters is 13 weeks per quarter. If want to be exact, 1 Oct to 31 Dec is 31+30+31=92 days which is 13 weeks and 1 day.

So next quarter distribution would be 0.18c x 8 weeks + 0.168c x 5 weeks = 2.28c
At today's price of 1.09 that's 8.36% annualised... much closer to your magical 8.5% mentioned.

However I guess assuming no new tenants we should be looking at more like 0.168c x 13 = 2.184c per quarter subsequently or 8% annualised.

Fli Fli said...

Hi AK!
Sorry, I'm either being meticulous or pedantic. But I did some "rigorous" calculation of my own which arrived at a slightly more optimistic outlook.

I humbly believer your calculation is off by about 8% or 1/12 as you calculated based on 12 weeks. It should be 13 weeks. One year is 52 weeks, divided by 4 quarters is 13 weeks per quarter. If want to be exact, 1 Oct to 31 Dec is 31+30+31=92 days which is 13 weeks and 1 day.

So next quarter distribution would be 0.18c x 8 weeks + 0.168c x 5 weeks = 2.28c
At today's price of 1.09 that's 8.36% annualised... much closer to your magical 8.5% mentioned.

However I guess assuming no new tenants we should be looking at more like 0.168c x 13 = 2.184c per quarter subsequently or 8% annualised.

Disclaimer
i have no background in finance and i consider myself a noob in stock investing. Haven't read a single book on investing in my life.
All the old birds here please correct me if my calculation is off. Thanks!

AK71 said...

Hi Fli Fli,

It is always good to be more meticulous especially when it comes to numbers with $ signs in front. ;p

Thank you so much for sharing with us your calculations.

I would be quite happy to be wrong on this one. :)

Fli Fli said...

Hi AK!
Oops, double posted, the first post was incomplete... thought you would have moderated that out :P

Anyway, there is a part 2.
Which is the even more optimistic part.
This is a bit of a flying pegasus now :D (Tian Ma Xing Kong)

Digging deeper into the numbers reveals interesting things.
(I may be imagining too much, someone please shoot me if that is so)

The latest financial statement show total shares to be around 690M, last quarter pre placement was 648.7M

Quarterly DPU has been stable around 2.4c past few rounds.
If we take private placement to be purely to pay off debt, DPU should drop to about 2.256c post placement
or 0.1735c weekly (taking 13 wks)
That's a drop of 0.144c quarterly.

Calculating at face value, the latest distribution at 0.18c would mean Chai Chee's contribution is the difference at 0.0065c (for 1 wk)
Quarterly that's 0.0845c contribution from Chai Chee.

Now, that would mean AMD is renting the place at pretty good rates!
Cause it is only 50% of Chai Chee. Assume management is able to rent out the remaining space at similar rate, at 100% occupancy thats 0.169c contribution which would more than compensate the 0.144c drop due to the placement.

One additional detail makes it even more compelling.
Chai Chee completion is supposed to be 26 Sept. So contribution can only start on 26 till 30 Sept. The latest distribution is for period 24 till 30 sept. Which means Chai Chee only contributed 5 out of the 7 days.

Assuming everything is straight-line relationship then by extrapolation, full quarterly contribution from Chai Chee should be 2/5 or 40% higher at 0.1183c quarterly or 0.0091 weekly.

Which means if Chai Chee contributed full 7 days for the week, the latest distribution should have been 0.1826 instead of 0.18.
Next quarter estimated would be 2.31c, and subsequently assuming no new tenants - 2.21c (8.1% annualised at 1.09$ price)

The 233058 sqft NLA released on 25 Nov is the vacancy left behind by the 4 master tenants who are not continuing. I believe that does not include the 50% space still left in Chai Chee. The potential is there for the management to perform.

For a rough calculation, assuming the 50% space at Chai Chee can be let out at the same price as what AMD currently is paying, and the 233058 sqft released on Nov 25 can be fully let out again at the old price then we should expect (0.1826c + 0.0091c weekly) ~ 2.49c DPU! Annualised at 1.09$ price gives 9.1% yield!
(Ie Best case scenario)

Haha!? so good ah?!
Now, AK or some other qian bei.... please help go through my calculation and teach me some accounting....

AK71 said...

Hi Fli Fli,

Very nice! :)

Well, I didn't put in the work that you did in digging into the details and what could be but I have the impression that if they were to achieve 100% occupation again, they could bump up DPU in the coming quarters.

All the positive assumptions will hinge upon whether they could reduce the vacancy rate or not. If we believe that the management is not being overly optimistic, then, we should buy more. If we believe that the management will face a tough time renting out the remaining space, then, we should hold back.

What do I believe in? I believe that we should buy when there is value for money and not if there is value for money. :)

AK71 said...

Sabana REIT: 4Q 2013 Results.

DPU 2.19c

NAV $1.07/unit

Leverage: 36.9%

All in financing cost: 4.1%

Interest cover ratio: 4.8x

Occupancy: 91.2%

See: Slides Presentation.

Invest Sg said...

Hi AK,
Sabana seems like a deep discount at current price with NAV of $0.88 and dividend yield at close to 13%. Why did the price keep come down so much? Would it be risky to buy at current price? Your thoughts would be appreciated. Thanks.

Invest Sg said...

Hi AK,
Sabana seems like a deep discount at current price with NAV of $0.88 and dividend yield at close to 13%. Why did the price keep come down so much? Would it be risky to buy at current price? Your thoughts would be appreciated. Thanks.

AK71 said...

Hi Invest SG,

Ask if the NAV is realistic. If a property generates low returns, the valuation should be revised lower.

Sabana REIT has seen sustained declining DPU. With more Master Leases expiring and with a poor track record of renewal, we could see operating costs going up and rental income declining further.

At 1.2c per quarter, even buying at 50c a unit would give us 9.6% yield but is this sustainable? -.-"

AK71 said...

Hi Invest SG,

You might want to read this:

Sabana REIT: What is a fair price and what could they do?

Invest Sg said...

Thanks AK.. got it.. won't touch it with a 10-foot pole then.. cheers :)

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