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Sabana REIT: Weaknesses & uncertainties.

Thursday, July 17, 2014

Sabana REIT has not shown much improvement in its quarterly results which probably shows that the leasing environment for industrial properties remains challenging and that the management made a bad decision in purchasing a half vacant high tech industrial building from AMD in Chai Chee late last year. Overall occupancy for the REIT's property portfolio inched up from 90.6% to 90.8%.

Things could get worse because 3 more master leases are expiring by end of this year while 11 master leases are expiring by end of next year. If what we saw late last year when 4 out of 5 master leases were not renewed should become the norm, Sabana REIT could see overall occupancy level declining much more and, consequently, we could see its distributable income lowering further.

Already, we know that 1 out of 3 master leases expiring this year will not be renewed.

Considering the fact that interest rates would probably be higher in future than not, when we look at REITs, we must always look at their debt level. A big chunk of debt, all $177.6 million of it, will be maturing in August 2015. That is barely a year away. We can only hope that they refinance it soon and at an interest rate that is either lower or unchanged from current level. Of course, a longer loan period would be preferred.

Gearing level is also much higher now at 37% compared to its IPO days when it was 26.5% while quarterly DPU has declined from an estimated 2.16c then to just 1.86c now. From these numbers alone, we can say that the management has not managed to grow the value of the REIT for retail investors. It is also worth noting that its interest cover ratio has been in steady decline from a very robust 7.9x to just 4.3x today.

Sabana REIT to me, now, is a picture of weaknesses and uncertainties.

1. Weakness in occupancy.

2. Weakness in making progress to fill up vacant space.

3. Weakness in DPU growth.

4. Weakness in its balance sheet.

5. Uncertainty regarding the renewal of expiring master leases.

6. Uncertainty as to whether vacant spaces will be reasonably filled soon.

7. Uncertainty as to whether higher cost of debt could be avoided.

Can the REIT overcome all its weaknesses? Well, I am hopeful that we could see some progress in filling up vacant spaces which could lead to higher income and a higher DPU. How long will it take? Well, this is one of those uncertainties I listed. It could take quite a while judging from the almost lack of progress in the last three months.

So, should it come as a surprise that Innotek Limited decided to sell their investment, amounting to 15,000,000 units in the REIT?

Of course, readers who have been following my coverage of Sabana REIT would know that I have divested some 90% of my original investment in Sabana REIT. Would I consider increasing my exposure to the REIT again?

All investments are good at the right price and for me to want to buy into Sabana REIT now, I would need a much higher distribution yield considering all the weaknesses and the uncertainties which I have listed.

This could either come about through a meaningful increase in DPU or a decrease in unit price, all else remaining equal.

Which would be more likely to happen in the next 12 to 18 months, I wonder?

See presentation slides:
Sabana REIT presentation 16 July 2014.

Related posts:
1. Innotek Limited to divest 15 million units.
2. Added more Croesus and reduced Sabana.
3. Portfolio review: Unexpectedly eventful.
4. Sabana REIT: 1Q 2014 DPU 1.88c.
"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."
AK, 17 April 2014.


Ray said...

awaiting the AK effect...
waiting for price to drop.
then AK's mom will ask "you blog about Sabana is it?"

AK71 said...

Hi Ray,

Hahahaha... Nah, Mr. Market doesn't care what I think or do. Mr. Market will do what Mr. Market does.

My mind wanders quite a bit at times but I would like to think that I am not delusional. ;p

AK71 said...

Prices and rentals of industrial space continued to moderate in the second quarter, as industrial occupancy rates continued to fall, according to a quarterly report by JTC.

Released on Thursday (July 24), the report said industrial occupancy rates in the second quarter fell by 0.9 percentage point from the previous quarter to 90.7 per cent – the lowest level since late 2007. For multiple-user factory space, the occupancy rate fell by 1.1 percentage points to 87.3 per cent.

On a year-on-year basis, the occupancy rate of the overall industrial property market fell by 1.7 percentage points, from 92.4 per cent to 90.7 per cent. For multiple-user factory space, the occupancy rate fell by 3.1 percentage points, from 90.4 per cent a year ago to 87.3 per cent in the second quarter.


AK71 said...

Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (Sabana REIT) said its manager has entered into a sale and purchase agreement with Adviva Distribution to acquire the property located at 10 Changi South Street 2 for $50 million.

On completion of the acquisition of the property, the building will be leased back to Adviva Distribution for a term of 10 years.

The property is a purpose-built part single-storey/part six-storey warehouse building with ancillary office areas. It is situated within the Changi South Industrial Estate, next to Changi Business Park and has a gross floor area of 189,609 square feet.

The property is a JTC leasehold estate of 30 + 27 years tenure commencing from 1 October 1994, with a remaining tenure of 37 years. The property was independently valued by Cushman & Wakefield VHS on 16 July 2014 at $54.3 million using the discounted cash flow method and the capitalisation approach, and includes the upfront land premium of $4.3 million for the balance of the term.


AK71 said...

Despite seeing gross revenue for the whole of 2014 grow by 12.1% to S$100.3 million from a year ago, the trust’s net property income (NPI) actually declined by 9.2% to S$72.95 million.

The decline was partly due to a huge 200% increase in property expenses for the trust. The higher property expenses were in turn caused by the increase of directly managed multi-tenanted properties from two to seven since 26 November 2013.

Another factor which contributed to the decline in NPI was the jump in lease management fees. Sabana REIT had acquired 15 properties during its listing and the lease management fees for those properties had been waived for a 3-year period; the waiver had ended in the fourth quarter of 2013, leading to lease management fees being charged for the 15 properties in 2014.

Going further down the REIT’s income statement, we’d see that there was a 20.9% increase in annual net finance costs to S$24.5 million for 2014. This, along with the lower NPI, had resulted in a 21% decline in net profit to S$39.1 million for Sabana REIT.

Income available for distribution to Sabana REIT’s unitholders followed suit with a 16.4% drop to S$51.6 million. With a bigger unit-count, Sabana REIT’s distribution per unit (DPU) declined by 21.9% to 7.33 cents compared to a year ago.

The Motley Fool, 22 Jan 15.

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