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Sabana REIT: Should I sell at a loss?

Friday, April 18, 2014

This blog post is in reply to a reader's comment: here.

Hi Kim,

You have asked one of the most difficult questions ever. :)

I wouldn't buy at the current price because I believe that Sabana REIT should offer a bigger premium in distribution yield compared to A-REIT, for example, because of its spotty track record. So, chanting to myself a familiar mantra which is "buy at a price I would not sell at and sell at a price I would not buy at", I should sell.

Of course, if we have to make a loss in selling an investment, it becomes a bit tougher. I never like selling at a loss. Who does?

However, if selling makes sense, we should sell even if it is at a loss and it makes sense if:

1. The business fundamentals have changed for the worse and the reward for staying invested has been drastically reduced or is, in some instances, non-existent.

OR

2. We have found a better investment with stronger fundamentals and better returns.

Of course, if we believe that Sabana REIT's distributable income of 1.88c or so per unit per quarter sufficiently compensates us for being invested at the current price, then, stay invested.

Personally, I would be more comfortable with at least an 8% yield which is what I am accustomed to getting from Sabana REIT. So, a unit price of 94c, all else remaining equal, would be more enticing.

If I were holding on to a loss making position in the REIT but if it is not a big position, I will probably continue to hold on. If it is a big position, I will sleep better at night if I sell half of my investment and take the loss as a fee paid to Mr. Market. If it is a very big position, I might sell 80% of my position. I will most probably not sell everything.

Not selling everything also gives me an incentive to keep monitoring the REIT as I still like the high tech industrial buildings which form about half of the REIT's portfolio. After all, it is not as if Sabana REIT is going to do a Titanic in the next 12 months.


All investments are good at the right price and there could be a chance to buy into the REIT again with a good margin of safety.

That is an imperfect approach that gives the imperfect me peace of mind. :)

Related post:
Sabana REIT: 1Q 2014.

36 comments:

Kim said...

Hi AK

Thank you very much for your time in answering my very difficult question. Appreciate it.
I have altogether 55 lots of banana bought at $1.205. This account for 16.5 % of my total portfolio.
If u were me...would u sell 50% or 80% or all ???
So difficult to bite the loss :(

AK71 said...

Hi Kim,

Now, this question is impossible for me to answer. I am not you. ;p

You know yourself best. What gives you a peace of mind? :)

Recruit Ong said...

harlow kim, dun mind me kay poh hor...
u will never learn if u keep looking to others for answers, just like u will never learn to ride a bicycle if someone keeps holding the handle for u. -_-"

Kim said...

Hi Ak
Thank you..peace of mind :)

Hi Recruit Ong
Thank you for your kind advice..yes I agree with you :)

PSTan said...

I sold mine with minor loss, as my avg purchase price is 1.04 cts.

sillyinvestor said...

Hi Ak and Kim,

To put things in better perspectives, maybe I explain why I sell. I am not offering any advice to KIm but talking to myself.

Sabana makes up 20% of portfolio, including dividends and commissions paid to brokers I lost only a few hundred dollars, that part is easy to bear, but why not just wait for 1 or 2 more payout to break even?

1) current yield is similar to bellwether A-REIT. I am not sure how long market will jat demand 7%. Given its track record.

2) assume I think 8% is fair yield, will I av down at 90plus cents? Depends on the renewal of master leases coming over the next 2 years. Like AK says, if all get renewed, we could quite safely say the worst in DPU is here and of price drop further, I might get a lower av price. But I dun dare to av down even if it goes to 90cents. Given how they hide the fact that 3 out of the 4 master leases building are 50% to68% occupied, even during annual report, they still sound upbeat. ? Can u trust them?

Also, if we pay school fees, I want to know what I have learnt. I was wondering why lor Chuan command such a high psf rent compared to other high tech building, well now I know, lor Chuan is 90 over percent occupied, the other is not. Next, when the master lease did not get renew, I know the prob. Of things getting worse is higher than not. Master tenants refusing to renew when there is not rental revision clause built in? Either sabana is asking fr sky high price or as I find out, on hindsight, it is the low occupancy rate at te first place.

I will look at industrial REIT differently from now. Think the school fees is worth it.

When I need to decide to key in a sell price? I ask myself what price to key? As I am busy during the day, I want to be sure to be able to sell. So I ask myself, how much school fees is reasonable? I look at the single biggest day fall, wow, 6%, surely it's not going to be that bad? Then I calculate, I dun think 2-3 lower bids will work, so I key in my highest threshold of reasonable loss, how much to pay for school fees. I got off at 1.04.

If I had not be able to sell, I will most prob still sell on Monday. I am clear with what I want. Dun be rash, but we cannot be hesitant when we are in the boxing ring with mr market.

Also, maybe always but smaller amout first. Sabana only form 12% of port, u av down when price tumble. We never know if our analysis is right.

Hope AK dun mind my kaypo, welcome anyone to point out any mistakes.

AK71 said...

Hi Mike,

Thank you very much for sharing your very logical train of thought. I am sure everyone will benefit from your talking to yourself. ;p

You are right about the management. This is, of course, the most difficult part of any FA work we do. Well, at least I find that it is the most difficult bit for me to do. -.-"

Destiny said...

Hi AK,
If your cost is 88c, would you continue to milk dividends or liquidate to take some capital gain?

Cory said...

I blogged about this situation 2 months ago. http://corylogics.blogspot.tw/2014/02/cory-diary-reits.html
Depending of situation i may do 50%, 80% or 100% trimming. Actually the reit i cut is Sabana. After which, the key is what's next ? I remind myself not to face similar situation in my next pick due to industry headwinds so I have to anticipate and do my maths.

AK71 said...

Hi Destiny,

In a couple of earlier blog posts, I revealed that I reduced my position in Sabana REIT. In the last blog post, I commented that I sold again.

My cost price didn't figure in my decision making process although the average is probably around 90c. What pushed me to sell was because I found what I thought was a better investment in Croesus Retail Trust and, later, the weaker distributable income announced by Sabana REIT.

Whether to sell or not depends on my motivation as an investor in the first instance. Does the investment satisfy my motivation? I ask this constantly.

AK71 said...

Hi Cory,

For sure, property prices feel toppish. High prices fuelled by optimism and low interest rates will correct themselves. It is just a matter of time.

The government's effort to bring down prices will add to the downward pressure. Oversupply will become more obvious in the next couple of years. Rentals will fall and prices will follow.

The prudent thing to do is to reduce our long positions in REITs with the spectre of higher interest rates and oversupply in future. Having said this, there will be some REITs which will perform better than others.

As an investor for income, I am concerned very much with the sustainability of the income stream and protection of my capital. :)

Noobie investor said...

Vested in Sabana since early 2011 , divested all my holdings on Thursday.

I see more downside to the unit price after xd

Will be channelling the funds into retail or hospitality reits :)

qinzheng said...

I'm have been vested since ipo, based on experience, if you have been constantly buying at each low point, I don't think you will be siting on paper loss. Anyway I'm not suggesting to buy or sell, however, once you learn to sleep in peace no matter how the market is, than you have truely paid all your tution money to the market....

Busta said...

Hi Kim,

If you find it helpful for reference, I have 150 lots of Sabana but decided to sell 100 lots last Fri. Will channel the funds to some other better performing and lower risk reits instead. Will probably sell the rest soon as well.

Cutting loss is painful, but it's a must if you want to be disciplined. Better lose some now than lose more in future.

Busta

Solace said...

I read the comments on Sabana Reits and like to add something on.

Some have pointed out the incompetency of the management, but I believe the core of the problems lies in the economics of the industrial Reits industry.

Even a star-studded management team can be humbled by the brutal economics of a particular industry.

As you rightly pointed out, increasing interest rates, oversupply will haunt this sector soon. Rentals and price will be corrected eventually.

Good idea to divest and suffer minor loss. Channel the money or keep the in war chest to look for a suitable industry to invest.

Even a average management team can achieve stellar result if the industry they are in are really profitable. There are definitely sectors that are more profitable than others. Nobody says life is always fair.

AK71 said...

Hi Solace,

Honestly, I think Sabana REIT has done worse than some industrial S-REITs I know. So, I really must say that the management has let unit holders down although I am aware of the increasingly challenging environment out there.

I just have to do a quick comparison with AIMS AMP Capital Industrial REIT and the difference in the quality of the management is plain to see.

Well, it takes time to tell how good a management team is. None of us have a working crystal ball. At least, I don't. -.-"

sillyinvestor said...

Hi AK and solace,

Cambridge did ok too, other like MLT can achieve positive rental revision over the past few years, Sabana has 3 master leases without rental revision clause and yet unable to renew the master lease??

Also, Lor Chuan is rent out to the manager itself, and is above 90% occupied, and even then it couldn't get it's master lease renewed? There is doubts about the bargaining power of manager or the commitment of the sponsor.

E H said...

Some observations. Rising interest rates and oversupply will haunt industrial reits. Everyone should have a stop loss. Management teams come and go. There is an increasing outcry by SMEs against rising rental rates, especially industrial space. If the lobby is loud and powerful enough, expect some future legislation to limit rent increases. Futureproof or hedge your portfolio.

Casey said...

Hi,
Just hope to share my very personal opinions. There are many conditions and risks stated in the IPO prospectus, spend some time to study the prospectus, I actually think that the banana's DPU payout was something more or less anticipated. So, beware of some other high yield industrial reits and foreign property trust, there are many ways to manipulate the DPU, it may last for the first two years. Randomly select some of the suspicious address, pay a visit to that address, one should be able to detect something fishy. Other than that, spare some time to study the trust structure, is it complicated? Why it has to be so complicated? Do you know, certain trust which is listed in Singapore, but its DPU is depending on the business arm that operate in another country that is subjected to the country's law which might not be favourable to the investor, that it is actually prone to have decrease in DPU/NAV in long term... Worst, there might be foreign law that prevent its distribution when it fails to have positive EPU. If one is a less sophisticated investor and only expecting a slow growing passive income like me, a reputable reit is more important than anything else. So far, I am satisfy with the performance of most of the bigger reits like MCT (my top favorite), MIT, CMT, FCT, CCT, etc in terms of sustainable DPU growth. DPU of AA has not improved much, but its share price improve tremendously in the past two years, you think it is ok to 'enter' now? first reit has done well so far but again it owns foreign properties. So, investment is depending on individual investment plan, timing, and the 'safe' price and not everyone is kind and honors enough to share full information with you as he/she/it might have his/her/its exit strategy, if one is investing in REIT or trust, that it is more prone to rights issue, have some provisional spare cash with you. Your investing strategy might work for you but not for me, it is very much depending on individual own preference, the right time and right price. Those who bought the banana at the low price and sold them before the latest report have collected fat profit, it is still a good investment, and they might be aware of the anticipated drop and exit early but not sharing.... why should they? It is your own decision, your own money...

AK71 said...

Hi Mike,

Perhaps, there was no intention to renew the leases from day one. Possible. I am walking on thin ice here. Shhh... ;p

AK71 said...

Hi E H,

Change is the only constant, isn't it? Investing in REITs has been a good thing in the last few years but we have to be realistic about the future. :)

AK71 said...

Hi Casey,

Thanks for sharing your thoughts which I enjoy very much. :)

I guess this is a good time to remember what Warren Buffett said before:

"Have the purchase price be so attractive that even a mediocre sale gives good results."

:)

Cory said...

Do not fall into the trap of "Too Much Money". What's this mean to me is ... 2 years ago capital gain is 2 years ago profit. "I celebrated already". The worst investment imo, is to lose profit that you record 2 years ago when we are all suppose to further our gains with a new balance sheet this year. Can Sabana management tells you that since they help create values 2 years ago, and now the big drop in dpu but OVERALL their performance is still good for past 3 years ? If not, why do you have different standard for our own performance ?

AK71 said...

Hi Cory,

I think that if everyone thinks like that, most people won't be happy with their performance simply because most of us won't be able to sell at peak prices. Things are always 20/20 on hindsight.

Of course, is it going to be a case of good enough that we make money and we should be happy? Well, it could be as simple as that. However, there should be some meaningful benchmark but not something that is onerous.

For someone who invested in Sabana REIT in late 2011, selling now would give a total return that trounce the STI in the same period. It definitely beats inflation by a big margin too. Roughly a return of 16% per annum? I think this counts as an outperformance. :)

Cory said...

I like your use of England. Free learning from here. Just learned how to pronounce "onerous". haha

Sorry for the grinding. :)

My point is that we should have a rough idea by now on the Sabana Mgmt capability, DPU trend, Rate risk, shareholder alignment, Supply etc to decide should we clean off all our shares or continue to hold some just because is "Free money" and is it something we can put a lower standard to hold on.

AK71 said...

Hi Cory,

Not doing a complete divestment is something I do quite regularly if an investment is still cash flow positive. If I can get to a point where whatever I am still holding is "free", I am quite happy to hold.

For investments which I believe have deteriorated to a point where the risk of staying invested is far greater than what I had initially thought acceptable, I would most likely fully divest.

Which category does Sabana REIT fall into?

Cory said...

Don't laugh at me ! I knwo u r the master :P

Here's my thought.

Reit sector now is average on DPU and exposure to rate impact,

Industrial reits below average due to on coming supply,

Company ability to manage master lease is below average.

Decision to acquire new property seems questionable by a few.

Use of financial engineering ?
And in future ?

I would put it bottom even among reits.

AK71 said...

Hi Cory,

Why should I laugh at you? What you have listed are things that are more or less common knowledge. There is nothing to laugh about.

Even if there should be something "wrong" in the list, unless it is a factual error, you are entitled to your opinion and your opinion is found in the last sentence.

I don't know if Sabana REIT's management rank last in the universe of S-REITs but I know that they are not amongst the best. They squandered a fine set of numbers and a portfolio of high quality properties instead of using a position of strength to improve returns on a per share basis.

Even so, I believe a lot of the damage that could be done has been done. The remaining wild cards are the Master Leases expiring end of the year and next year. If these should be successfully renewed, I believe that the REIT might have seen its lowest point, all else remaining equal.

I am quite happy to keep an eye on something that no one else seems interested in. I have a much smaller position in the REIT now but it is enough to give me an incentive to continue tracking its performance.

I am no master.

Christos said...

Hi.
Was glad to be able to hear some comments on Sabana Reit. Foregone this quarter dividend and sold all my 200 lots at $1.04 this morning

Kim said...

Hi Sillyinvestor and Busta

Thank u for sharing your view and experience.
I have sold off my 55 lots of banana first thing this morning....

Christos said...

I think Sabana will only looks attractive if it falls below $0.95. Real bargain probably below $0.90. By then, it will only be worth considering their dividend reinvestment plan; low price buy more units to earn more units. - Having said that, I m not sure if it is realistic to most investors to expect a 8% yield instead of 7.5% under current economic condition..

AK71 said...

Hi Christos,

Coincidentally, my entry prices for my remaining investment in Sabana REIT are all under 90c.

I also believe that Sabana REIT will become more compelling as an investment for income once unit price goes under 95c.

I believe that, over time, Mr. Market will demand a distribution yield premium from Sabana REIT compared to A-REIT. How much is the premium going to be? Going by past numbers, a spread of 1.5% to 2% seems realistic.

I don't know how the price will move but I do know what I will do if price does move.

Christos said...

Hi AK,

Thats very commendable that you bought most units under $0.90.:) Basing on your purchase price, its yield is still above 8%. Personally, I think you don't need to sell if you are not tight up financially.

On my side, my average price for all my lots was around $0.96 over the past 2 years of accumulation, but did not buy substantially last year. My reason to bail out was simple: 1) Purchase of new condo and needing to stand by portion of cash. 2) Taking this same period, re-shuffle my priority on financing and adjust my porfolio for better yield.

Initially, I thought of continuing in Sabana yield play, having trusted its dividend could give some support on my financing to my home purchase over next 3 years, but was slightly let down by their loss of master tenants support as well as poor spread of tenancy leasing. This year, there will be some more renewal of tenancy coming up.

Have you consider other reits like AIMPSreits, Starhill, Lippomall? I think First Reit has much stable spread of leasing. Though each has some pro and cons. Either lower yield than Sabana or higher book-NAV price.

AIMPSReit was below NAV, low gearing and better yield than Sabana at this point. Tenancy leasing is well spread as well. Lippomall has been consolidating at current price range for quite a while, good yield too. A-Reit is a little too 'blue chip' for me, I ll rather get undervalue stocks for that kind of price range.:)

AK71 said...

Hi Christos,

Thanks for sharing. :)

I have sold more than 80% of my investment in Sabana REIT. The balance, I am quite prepared to hold although I believe that there could be more downside if the sole Master Lease expiring towards the end of this year does not get renewed. Next year, there will be a few more.

My current largest position in an S-REIT is AIMS AMP Capital Industrial REIT. This is even after a minor divestment which I blogged about recently. :)

LippoMalls, I did partial divestments last year and this year. The problem of a weak Rupiah could get worse because the REIT's distributions and debts are in S$. The REIT will have to strengthen its hedge against forex risk which will be costly.

I used to hold some Starhill but that was before I decided to heavily invest in industrial REITs a few years ago. It went by another name back then. Out of touch by now.

Now, I am simply accumulating cash and waiting for opportunities. :)

Christos said...

Hi AK,

Do you invest in stocks asides of REITs? Lately I m vested over OUE. Though I m not too sure about their REITs petformance.

By the way, how is AIMPSreit going? Do they have dividend reinvestment plan as well? In your opinion, is the market price getting a little less favorable? I m aware that one of the property lease is expiring very soon.

AK71 said...

Hi Christos,

Yes, I have investments in non-REITs too. I blog about some of them before.

Generally, I am more of an income investor but I also invest for growth and do a bit of trading sometimes as well.

I think these two blog posts might be relevant and be of interest to you:

Motivations and methods.

Strategy to grow wealth and augment income.

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