Sabana REIT: Bought more at 93.5c.

Today, I increased my investment in Sabana REIT once more. Price? 93.5c /unit. I still have the same question and that is why are people selling at this level?

I have a faint suspicion that a former substantial shareholder, Moore Capital Advisors, who last made a divestment which brought their investment in the REIT to less than 5% of the total units in issue back in December 2010, are still divesting. Of course, they no longer need to declare any sale of units although they still had some 29,752 lots on hand since that divestment in December 2010.

Why am I bullish on the REIT? The REIT is still trading CD with a DPU of 3.04c. Granted that this is an extraordinary payout as it represents distributable income from the REIT's listing in November 2010 to end March 2011. Quarterly, expect a DPU of about 2.2c as the norm. So, the distribution yield is about 9.4% at a unit price of 93.5c.

There are certain arguments that the REIT has a weak sponsor, an untested management and that the quality of its assets is questionable. However, looking at the strength of its balance sheet, its low gearing of 24.9%, its NAV/unit of 98c and its interest cover ratio of 7.9x, it would have to take a very incompetent manager to foul things up. Well, I can only hope that the CEO, Mr Kevin Xayaraj, is a competent one. He was with Ascendas Land (Singapore) Pte Ltd for two years in 2004 to 2005 before moving on to Cambridge Industrial Property Management Pte. Ltd. where he stayed till August 2009.

It is reassuring that the manager's performance fee is only payable if the REIT generates an annual growth in DPU of at least 10% over the previous financial year. If the DPU does not grow 10%, no performance fee. If the manager makes income accretive acquisitions which are financed through debt, DPU is likely to grow as well. However, if such acquisitions are financed through equity fund raising, the manager will have to be very careful to ensure that DPU does not suffer a dilution. How will the manager perform? This is a wild card, isn't it?

As for the quality of assets, DTZ revealed that Sabana REIT has some high quality assets such as Pantech 21 (72 years remaining) and Geo-Tele building (45 years remaining). In fact, 44% of the REIT's portfolio is made up of high-tech industrial buildings when compared to the number of warehousing buildings. The land leases on the REIT's high-tech industrial buildings do not start expiring until year 2051.

Investing in anything has attendant risks. Investing in Sabana REIT at its IPO price of S$1.05/unit might not have been the most prudent thing to do. With smallish REITs, there were better yielding alternatives out there. However, at 93.5c/unit, the risk premium has been watered down significantly. Could I be totally wrong about this? I think it unlikely but the possibility exists. After all, we can and should reduce risk in investments. It is near impossible to eliminate risk.

Looking at the chart, the lowest the REIT's unit price has been to was 92c while 93c can be said to be a rather strong, many times tested immediate support. Upon XD next Tuesday, we would probably see the REIT's unit price weaken.

Could we see 92c tested again? Possibly. Could we see price form a new low? Why not? How low? I do not know. However, I do know that if it gets much lower as to give a distribution yield of 10%, I am buying many more units. Unit price would have to be about 88c to give that kind of yield.