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Sabana REIT: Buy but remember the Sukuk.

Wednesday, February 26, 2014

In November 2013, I said that I reduced my investment in Sabana REIT and moved the funds into Croesus Retail Trust, believing that a reduction in my exposure to industrial properties in Singapore was sensible. At the time, Sabana REIT was trading at about $1.09 a unit.

Then, in January 2014, I wrote a piece saying that Sabana REIT's quarterly results were within my expectations and that trading at $1.07 a unit, we could see its unit price fall to $1.03 once the REIT went XD if Mr. Market were to demand a 2% premium over the market leader, A-REIT.

I also said that although I was not buying at $1.07, neither was I selling. The reason was because Sabana REIT's relatively low occupancy of 91.2% could improve over time. So, we could see DPU and distribution yield improving, everything else remaining equal.

How much of an improvement would we see? Well, assuming that Sabana REIT improved occupancy of its properties to 96% and that DPU improved proportionally, we could see an annualised DPU of 9.2c. This would give us a yield of some 8.6% at its NAV of $1.07 a unit.

At a price of $1.03 per unit, we are just a whisker away from a 9% yield. It would be 8.93%. This is rather attractive and at $1.02 a unit, we see a prospective distribution yield of 9.02%. $1.02 a unit also coincides with a technical support provided by Fibo retracement lines.

So, it is not surprising to see investors buying again at current prices even though, technically, I see a stronger support at 97.5c or 98c a unit. Do I really think unit price could go that low? This is just what I see in the chart as a possibility. I don't know if it would happen.

However, remember the $80 million Convertible Sukuk due on 24 September 2017? In 2012, when I blogged about this, I said that if all should be converted to new units in the REIT, they would add some 10.5% to all units in issue. This would dilute existing stakeholders' interests but the debt would disappear.

"During the financial year ended 31 December 2013, certain Converting Sukukholders had converted an aggregate principal amount of $7.5 million. As a result, the Group elected to issue 6,285,090 units at the then conversion price of $1.1933 to these Converting Sukukholders."
Source: Full year 2013 report.

The bond holders pay a higher than market price and the REIT's gearing level declines at the same time. Seems like a good deal for the REIT. Actually, it makes sense to the bondholders too as they are paid a coupon of only 4.5%. Even converting to units at $1.1933 would mean enjoying a distribution yield of some 7.3%. Of course, this is leveraged yield. So, not really comparable.

Anyway, we should not worry about what these bond holders should do. Instead, we should think about how would their actions impact us as investors in the REIT.

If all the bond holders should convert to units by 2017, be prepared for a further 8.8% dilution but the REIT's gearing would then decline to a lower 33% thereabouts. Is this a good thing?

Well, it would mean that any increase in DPU from improving occupancy level could be diluted and we might not see much of a difference from current levels. If there should be zero improvement in occupancy level, which I think unlikely, then, we could see DPU reducing to 8.08c which means a yield of 7.84% at a unit price of $1.03 which makes a unit price of 98c a unit seems less far fetched.

Of course, if the convertible bond holders decide not to convert to units anymore and wait for maturity in September 2017, then, expect the status quo, everything else remaining equal.

What the bond holders would do is anyone's guess but what are investors in the REIT to do? Well, add to long positions at $1.02 to $1.03 a unit if we like but bear in mind the convertible bond and the possible effects. Are we comfortable with it?

In my opinion, prices of $1.02 and $1.03 a unit are not bad but don't be surprised if unit price should decline to 98c. So, always have a war chest ready.

Related posts:
1. Sabana REIT: Convertible Sukuk.
2. Added Croesus Retail Trust and reduced Sabana REIT.
3. Sabana REIT: After the 4Q 2013 results, am I buying or selling?


seefei said...

thanks for the timely reminder from your bowling ball. qing for some goodies at 1.02 now.

AK71 said...

Hi seefei,

Crossing fingers! Hope it is a strike and not a gutter ball. -.-"

seefei said...

mkt closed. too far down the q. order not filled. will q again.

AK71 said...

Business park and high-tech industrial rents outpaced those at conventional industrial space in the first quarter this year, property consultancy DTZ Research said in a report on Monday.

While conventional industrial space rents held up in the quarter due to manufacturing sector expansion, they may be weighed down by more new supply being completed, DTZ said. It added that business park rents are expected to grow further this year.

Average gross rents for business park space climbed 2.1 per cent to $4.80 per sq ft (psf) per month in January through March from the preceding three months. High-tech industrial space rents grew 1.6 per cent to $3.15 psf per month over the period.

However, conventional industrial space rents stayed flat in the first quarter. Rents on the first floor commanded $2.20 psf per month and upper floors were $1.80 psf per month.


AK71 said...

Sabana Shari'ah Compliant Industrial Real Estate Investment Trust announced the establishment of a distribution reinvestment plan, pursuant to which unitholders of Sabana REIT may elect to receive new units in lieu of part only or all of the cash amount of any distribu˘Çćčon to which the DRP applies.

This will enable Unitholders to increase their unitholdings in Sabana REIT without incurring brokerage fees, stamp duties, if any, and other related costs.

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