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

Tuesday, October 20, 2015

The last time I blogged about Sabana REIT was in February this year.

I suggested that we might want to view some assertions in cyberspace that Sabana REIT offered great value for money because of its relatively high yield and rather big discount to NAV with a dose of scepticism.


What I was most concerned about was the matter of expiring master leases, 11 in all.


Subsequent to the end of 3Q 2015, the Manager converted one building, namely 23 Serangoon North Avenue 5, from master lease to multi tenanted.

The Manager is in the final stage of negotiations for remaining 10 master leases slated to expire in 4Q 2015.

Source: Press Release.



 
What is the occupancy of 23 Serangoon North Ave 5? I very much doubt that it is 100%. DPU is already lower in Q3 and it is likely to take another hit in Q4 as property income reduces and operational cost goes up because of this development.


Also, the language lacks transparency. When we hear "final stage of negotiations", we get the impression that negotiations are likely to be successful.

However, realistically, we should be prepared that more properties would be converted from having a master lease to being multi tenanted.

A lack of transparency makes it difficult for anyone to estimate what is truly a fair price to pay for Sabana REIT. Annualising Q3's DPU of 1.77c is a mistake but let's do it anyway. 7.08c. With a unit price of 78c, we are looking at a 9.07% distribution yield.

If Mr. Market is willing to pay 78c a unit, my interpretation is that Mr. Market is probably expecting quarterly DPU to decline to 1.56c or a 12% decline from 1.77c in due course. This would give an eventual 8% yield at 78c a unit.


Now, is Mr. Market right?

Well, we know the saying that Mr. Market is always right but if the DPU should decline by much more, what then?

We should be able to make a more accurate guess by end of the year and be dead sure by end of 1Q 2016.


So, if we are buying Sabana REIT with the understanding that DPU would probably reduce quite significantly and are comfortable with it, then, 78c a unit might be a fair price to pay for us.

However, if we feel that an entry price of 78c a unit with an estimated 8% yield a few months down the road would not sufficiently address some other risks such as:

1. Rising risk free rates means Mr. Market might demand a higher distribution yield. All else being equal, unit price would have to decline.


2. Rising interest rates also means a higher debt burden which would weigh down DPU. Maturing debt in 2016. $138 million. Would cost of debt increase?

3. Expiring leases in 2016. About 11.4% of NLA is expiring in 2016 and that includes another master lease.

4. Declining interest cover ratio. It has dipped below 4x and is now lower at 3.8x.

5. Possible decline in value of properties. This would impact gearing level.

We won't be wrong to ask to what degree has a unit price of 78c a unit taken all these in?

If Sabana REIT is confident that its NAV/unit of $1.04 or so is realistic, then, I would like for them to sell some of their properties. That is probably the best way to see if the valuations are realistic. 

Of course, the reason for this suggestion is really to unlock value for the shareholders and strengthen the REIT's balance sheet.


Related post:What is the right price to buy into Sabana REIT?

Sabana REIT's Presentation in September 2015 for investors: here.

11 comments:

FoodieFC said...

Hi AK

their management is a big ?. Not going to purchase them in the near future. They are still like they are 1 or 2 years ago, not doing well in renewing the master leases.

Serendib said...

I had quite a significant position (ok well by my standards, not yours!)in Sabana REIT. I was very happy with the yield and capital appreciation - I happened to mention this to a friend who works in the real estate industry. He told me to look carefully at the mgmt and their background. I still held on, but when I saw they were struggling to keep utilisation up as there was an oversupply of industrial facilities, I bailed out about 18 months ago at around $1.05 with a small profit. best sale i ever made! As Buffett said, you only see who's not wearing swimming trunks when the tide goes out.

AK71 said...

Hi FoodieFC,

My view of the management has not changed since I started divesting in 2013. They have certainly not done anything to change my opinion since. -.-"

AK71 said...

Hi Serendib,

Management's competence and alignment of interest are both important considerations, definitely. We did the right thing to cut our exposure when we did. ;)

I retain a relatively small investment in the REIT which is really free of cost. This gives me a small incentive to keep tracking the REIT's performance.

Why swimming trunks? What about the ladies? Wouldn't they be topless? ;p

Serendib said...

Hi AK, now now, let's stick to investing =P

AK71 said...

Hi Serendib,

Alamak. And they tell me I am boring. ;p

Jing Quan said...

Dear AK,

Nice meeting you on Sat. sabana I see it as a 50-50 investment but FA isn't my best skill and when i read you break down on it. I think better not risk :P Another Reit that hopefully will not suffer the same fate is cache.**i have a small position :(

Earlier i was looking at sabana and few other reits counters eg: A-Reit but sadly i missed the boat on soilbuildz**too expensive now** which i thought was actually pretty decent.

Hard times not only for the blue chips but also for the ever so resilient reits. eat potato chips and get fat the best!

Cheers!

AK71 said...

Hi Jing Quan,

Good of you to come up after the event to say "hi", together with quite a few other people. I am glad we had a chance to chat. :)

I have a small long position in Cache Logistics Trust too. I think that one ranks a bit higher than Sabana REIT in my list. I still prefer AIMS AMP Capital Industrial REIT and Soilbuild REIT though. ;)

I am a lazy fellow and I rather do nothing for now. ;p

Chula Sulagaesuan said...

Sabana was a good lesson for me to not blindly look at DPU and invest in it. I just started investing back then and Sabana is one the first REIT that I bought. After a year of disappointing results and declining price, I sold off at a loss of a few hundred bucks (dividends included).

I guess it was the right decision not to hold further. The price now is 15% lower than the price I sold and 25% lower than the price I bought LOL.

ZHANG Zheng said...

Hi AK
SABANA REIT has recently divested 2 properties: 3 KALLANG WAY 2A and 200 PANDAN LOOP between Nov and Dec 2015. Both sale prices are slightly higher than their latest evaluation before the sales.

Do the recent 2 transitions make their NBV reliable? Thank you.

AK71 said...

Hi Zhang Zheng,

I have not been following developments at the REIT lately. However, if what you said is accurate, then, I believe that Sabana REIT is doing the right thing to demonstrate that their properties' valuations are realistic and also to reduce the REIT's gearing level. However, I think they are just fighting fire now.

"... out of the 11 master leases expired in 2015, 6 master leases have been signed, 3 properties converted into multi-tenanted buildings, 1 being divested, and the remaining 1 is temporarily vacant." 26 Nov 2015.

"... divestment of 3 Kallang Way 2A, Fong Tat Building, Singapore 347493 with the existing tenant, Fong Tat Motor Co. Pte. Ltd., for a sale consideration of S$16.6 million. Knight Frank Pte Ltd valued the Property at S$16.2 million as at 26 October 2015."

"... Sabana Shari'ah Compliant Industrial Real Estate Investment Trust has entered into a conditional sale and purchase agreement for the proposed divestment of 200 Pandan Loop, Pantech 21, Singapore 128388 with BS Pantech Pte. Ltd. for the sum of S$38.0 million. Loss on revaluation of the Property, representing the deficit of the Sale Consideration over its book value, is estimated to be S$6.9 million."

What is worrisome is "216 Pandan Loop which is now vacant with effect from 26 November 2015." Will they be able to sell it?

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