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Sabana REIT: 1Q 2014 DPU 1.88c.

Thursday, April 17, 2014

Although I expected a decline in DPU from Sabana REIT, the decline to 1.88c is rather drastic. Based on a unit price of $1.08, this gives us an annualised distribution yield of only 7.05%.

Remember I made an assumption in an earlier blog post on Sabana REIT regarding how Mr. Market might demand a premium in distribution yield from the REIT compared to A-REIT? At that time, I said that Mr. Market might send the unit price down to $1.03 if it should demand an 8.5% yield. In fact, it touched a low of $1.005.

With distribution yield now at 7.05%, to get to an 8% yield, unit price might fall to 94c. Well, a drastic fall in DPU might just be accompanied by a drastic fall in unit price. I am not saying that it will happen but I won't be surprised if it should happen.

If we look at the numbers, it is really the almost 400% increase in property expenses that has resulted in a huge reduction in DPU. Of course, there is also the issuance of new units in payment to the management of the REIT as well as a higher vacancy rate.

As investors, we want to know if the increase in property expenses is temporary or permanent. So, we have to look at the details. These expenses are:


(i) Property and lease management fees incurred for the Acquisition Property;


(ii) Higher property tax, maintenance, utilities and applicable land rent expense, in line with the increase of directly managed multi-tenanted properties from one in 1Q 2013 to six in 1Q 2014;


(iii) Higher property management fees in line with the higher revenue from 151 Lorong Chuan; and


(iv) Lease management fees being charged to the 15 properties acquired during IPO, following the expiry of the three-year waiver period in 4Q 2013
 

Source: 1st Quarter Financial Statement.

From what I can see, all four expense items are here to stay. So, even if the REIT should achieve 100% occupancy once again, it will be difficult for it to achieve a DPU that is even close to that of last quarter's.

The much lower DPU this quarter and a weaker outlook for industrial properties, together with my belief that the management's interests are not strongly aligned with minority unit holders', have pushed me to look into possibly making another partial divestment.

The good news? We now know what is probably a realistically sustainable DPU for Sabana REIT, everything else remaining equal. Things could worsen, of course, if the one Master Lease expiring end of 2014 is not renewed but it would be unlikely for things to worsen considerably. Having baseline information like this will help us in deciding when it could be a good time to buy into the REIT again with a greater measure of confidence.

See presentation slides: here.

Related posts:
1. 4Q 2013 results.
2. Reduced Sabana REIT.
3. Buy but remember the Sukuk.

35 comments:

Recruit Ong said...

Wahaha! opened at 1.04, lucky lim peh divested this week, heng ah!
anyway lousy management, pffffft!

AK71 said...

Hi Ong,

Well, to be fair, it is not just the management that is a problem. I overlooked a piece of financial engineering in earlier analyses.

Anyway, another batch of partial divestment today means that my remaining long position in the REIT is "free of charge". ;p

Cory said...

Financial engineering is scary practice. Divested this counter in Jan. reluctantly due to the Known but never expects results of 22% reduction in DPU.

If we know chances are is going to continue to go down, why not just lock profit and find something else ?

Recruit Ong said...

"FOC"? oh u mean u take all the dividends u received over the yrs * cap gains to offset your buy price? good leh

i think long position not much point for this counter liao... their master leases ending next yr and there is no indication things will improve a lot even if they sell off their assets. u see their expenses so jia lat also... dont see much upside in the near term to mid term lor... hopefully i am wrong lor

sillyinvestor said...

We of the same frequency and thoughts.

I have divested fully today. Paid a modest school fees, at least I picked up some at 1.01 and av down, otherwise, it could be worse

The Financial engineering part is part IV of costs, I overlooked that too.
http://sillyinvestor.wordpress.com/2014/04/16/sabana-reit-its-time-to-say-goodbye/

sillyinvestor said...

Actually, I dun even think current low DpU is sustainable over the long run, since almost all master leases are up fr renewal at 2015.


We won't know what is Ye occupancy since under master leases, occupancy is always100%.

But, there is a price for everything. Is sabana worthless? Of course not, but current price is over- valued

AK71 said...

Hi Cory,

My motivation for being invested in Sabana REIT is for income. So, although I expected a reduction in DPU, the expected reduction was still acceptable to me. Unfortunately, the expected did not happen. The unexpected did and not in a pleasant way.

If we have a clear picture of financial engineering and know what to expect, it is not scary. It is not knowing that is scary. So, this was an oversight. -.-"

AK71 said...

Hi Ong,

Over the last 3 years, the total income distributions as well as capital gains from being invested in Sabana REIT is more than double the cost of my remaining long position in the REIT. So, no matter what is the DPU from now, it is free money to me. Regular pocket money. Not hoping for any upside in unit price. :)

AK71 said...

Hi Mike,

For this type of financial engineering, it is harder to say what the extent of the damage might be unless we are in the industry. So, even if we had known of its existence, it is difficult to weigh the potential impact.

Anyway, a good lesson for me. Time to move on. :)

AK71 said...

Hi Mike,

There are always wild cards and a card here is whether the Master Leases will be renewed when the time comes. No one can be sure either way.

Financially, Sabana REIT is fairly sound and the management, although not top-notch, is not incompetent (although I believe them to be more self serving). They have pretty good assets and I like their portfolio of high tech industrial buildings.

If Mr. Market should go into a depression and offered a much lower price, then, it could be a good investment once more.

Gary said...

Attended Suntec AGM, got one speaker voice and I thought it was AK!!!! Lolx

AK71 said...

Hi Gary,

OMG! Why did you think he was me? My voice? I am baffled. -.-"

Gary said...

I listened to an interview between you and Adam Wong. So somehow it reminds of you....

AK71 said...

Hi Gary,

Ha ha. I see. That interview is no longer available online. I think the file must have been corrupted or something. You have good memory. :)

ted said...

What is this Financial Engineering you guys are talking about? I don't see the specific instance of it the 4 points mentioned. A bit lost...

AK71 said...

Hi ted,

That would be point IV in the list. :)

The waiver of lease management fees in the first 3 years helped to bump up the REIT's distributable income.

ted said...

Wah, the feeling it gives me is like "fine print" instead of the "accounting" vibe that the term financial engineering gave me.
I googled the FE term and it does not really explain to me how it relates to this. (http://www.investopedia.com/terms/f/financialengineering.asp)

I thought FE is a bit like borrow some money this way (sukuk?), borrow some that way (bank loan), hedge here/there, etc, to get better financial benefits for the company.

PY said...

Divested ALL of my Sabana REITS (Cash+CPF)today after holding for 3+ years. Fully agreed with you that the manager's interest is not aligned with minority interest. I began have such feeling when they placed out additional units at steep discount last year to purchase additional properties.

AK71 said...

Hi ted,

I think we are pretty liberal with the use of the phrase. ;p

Any action taken to boost DPU or to lower gearing "artificially" falls under "financial engineering". LOL.

AK71 said...

Hi PY,

Well, for those who got in at 94c a unit or lower, Sabana REIT has been a pretty decent investment in the last 3 years. Distribution yield of about 10% (or more) plus a 10% capital gain (or more) to boot. :)

Time to look for a better deal elsewhere. ;)

OT83 said...

Hi ak,

Haha I joined the fun today. I said byebye to banana today before I saw this post of yours
too!

OT

Casey said...

Hi Ak71, I always think that its yield was too good to be truth, I can't explain why it can command a NPI than the similar type from the more superior MIT, hence, was hesitate to invest. Similarly, i have a doubt on CRT, I will not consider invest in it at all if the price is higher than 0.89.
Casey

AK71 said...

Hi OT,

It seems that everyone is abandoning their investment in Sabana REIT. Then, who are the people supporting it at $1.04 today? Do you know? ;p

AK71 said...

Hi Casey,

Croesus Retail Trust? Closed exactly at 89c. Just nice for you to get some. :D

Capricon said...

AK,
Do you happen to know Croesus has any such lease mgt fees waiver ? We do know that they pay out 100% NPI for first 2years.

I attended a CRT retail investor day organized by cimb 2 weeks ago,Jeremy yong spoke , They seem desperately wanted to bump up the share price so that they can borrow more and in fact there are plans for acquisition soon. He mention they did not do placements or rights for recent acquisitions because they do not wish to dilute the existing shareholders' holdings. He also highlighted the potential of japan in view that other Singapore property developer are buying into japan recently too.

Casey said...

Hi AK,
I have gotten some at 0.87, 0.875, with an expectation of short term yield of 8-9%, sustainable yield of 5-6%. I will sell them at any time when the sustainable yield to price fall below 5%. however, with the bad track record of J-prop investment from the FCOT, SGreit, AHT, etc, how could CRT obtain such high yield at such high property valuation? it is interesting to know the unseen story of CRT if any. If it is a happy story, I will enjoy the yield, if it is a sad story, I am ready to pay the learning fee. If I sell early, I will have a free show. Having said that, I am anticipating a sad story, so a free show is most desirable.
Casey.

AK71 said...

Hi Capricon,

I will reply to your comment in a blog post. Look out for it. :)

AK71 said...

Hi Casey,

I would like to have a free show too. I am always pragmatic. Well, I like to think I am anyway. ;p

FoodieFC said...

its quite weird that they seems to have great difficulties renewing the lease contracts (esp for the master lease).

waiting for it to fall below $1 to divest in it again

AK71 said...

Hi FoodieFC,

Well, there will be more new supply of industrial space than there will be demand in this year and next. So, softness in occupancy and rentals is to be expected.

Sabana REIT should work really hard at retaining tenants and filling up vacant space now. With only 90% occupancy, they should not be doing any AEIs or acquisitions (both of which spend money) to improve performance now.

I think it is obvious that they have lost the confidence of the retail investing community. Need to get it back.

Given the current set of numbers, closer to 94c will see me turn buyer. ;p

lzyData said...

It seems like the drop in DPU and poor prospects ahead for Sabana stem from poor management decisions. If the earning power of the properties has dipped, eventually their valuation will dip too. Who knows whether 1.88c/quarter is the low. Rather than targeting Sabana at a lower price level, wouldn't it be more prudent to just skip this and avoid the headaches? It's not like there aren't any other industrial REITs to choose from :)

AK71 said...

Hi IzyData,

Well, I am not targeting Sabana REIT per se. I have no loyalty to any one REIT or a group of REITs. :)

Sabana REIT's management does seem rather lacking in quality but if Mr. Market should become overly pessimistic, then, Sabana REIT could still be a good investment. ;)

Kim said...

Hi AK

I have bought sabana lots at $1.205, sometime last year july.
If you were me, could you be divesting all of them now and swallow the loss ?

AK71 said...

Hi Kim,

I wrote such a long reply that I think I should publish it as a regular blog post. Look out for it. :)

AK71 said...

Rents for prime warehouse space in Singapore weakened for the third straight quarter in the April-June period, according to the latest report by property services firm Colliers International on Friday (July 11).

Savills says a small number of manufacturers have started moving their operations to the Iskandar region, in an effort to reduce costs.

http://www.channelnewsasia.com/news/business/singapore/warehouse-rents-fell-for/1255104.html

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