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What is the right price to buy into Sabana REIT?

Tuesday, February 17, 2015

Last Friday, when I met up with some friends, I compared Sabana REIT with AIMS AMP Capital Industrial REIT to exemplify what I thought are some of the characteristics of a REIT whose management's interests are more aligned with minority shareholders'.

I also made the comment that although I substantially reduced my investment in Sabana REIT starting in late 2013, there could be a time to invest in Sabana REIT again. This is because all investments are good at the right price.

I know that many are looking at Sabana REIT and thinking of buying because its unit price has fallen by quite a bit in the last one year and more. I know because many asked me, one way or another, if I am adding to my much reduced long position.

I didn't give much information but I generally said that I was not interested as I thought that the REIT's management was mediocre in ability and self-serving in motivation.

I know that there are some investors in S-REITs who use NAV as a main consideration to decide if an investment is undervalued. Trading at a 12% to 13% discount to its NAV of $1.04 per unit, Sabana REIT would look undervalued to them. 

Well, unless we can reasonably expect the REIT to divest a few properties at valuation or maybe a slight premium (dare I hope?) to valuation, it is more important to consider the REIT's distribution yield now and in the future if we are satisfied that the REIT is going to stay financially healthy.

Well, financially, Sabana REIT looks healthy enough. Gearing is at 38% with 88% of borrowings having fixed interest rates. Interest cover ratio at 4.1x is passable. They have also been active in refinancing their loans ahead of their maturities. All in cost of financing is at 4.1%.

So, what is the distribution yield? With Sabana REIT, it won't be too wrong to annualise the last quarter's DPU of 1.78c as the decline in DPU is not due to any transient reason. This means that, without any improvement in occupancy or positive rental reversions, all else remaining equal, we can expect a DPU of 7.12c in 2015. Buying at 91c a unit would give a distribution yield of some 7.82%. Is this good enough for me? I don't think so.

Hey, current occupancy is only a bit more than 90%. So, there is a lot of room for improvement, isn't there? Well, this was what the management said when they bought a half vacant building from AMD in Chai Chee many moons ago. 

I have not seen any significant improvement in occupancy since then. There is a lot more supply in the market now and asking rents are probably softening. Stiffer competition? Yes, you said it.

Since the prospects of improving occupancy are rather dim, what about retaining the REITs current tenants? We have seen how the REIT had been unable to renew all their expiring master leases in the past. Now, in 2015 this year, the REIT has a total of 11 expiring Master Leases! Take a moment and let this sink in.

What happens if the REIT is unable to renew these master leases or if they are unable to secure new takers? The properties would be converted into multi-tenanted buildings. What does this mean for shareholders? Occupancy would take a hit. Income would take a hit. Management fee would increase. Translation? DPU would probably decline.

In their presentation in January 2015, the management said:

With approximately 10 months to go before the expiry of the 11 master leases, the Manager is working towards renewing or securing new master leases for 7 of them. The remaining 4 properties will likely be converted into multi-tenanted buildings.
Source: FY2014 Presentation.

I try not to be overly optimistic or pessimistic. I try to be pragmatic.

The pragmatist in me says that it is OK to hold on to my remaining investment which I bought at a pretty low price (and are, for a while now, free of cost) during the Fiscal Cliff debacle in the USA a few years ago but to buy now at 91c a unit, it just isn't the same and in more ways than one too.

Related posts:
1. How to have peace of mind as an investor?
2. Overpaid for our investments in business trusts?
3. Sabana REIT: Weaknesses and uncertainties.


AhJohn said...

Great analysis! Thanks

AK71 said...

Hi AhJohn,

Just talking to myself as usual, you know, but you are welcome to listen in. ;p

yeh said...

hi ak
gong xi fa cai.
wish you a happy cny.

and most important, a healthy year ahead:)

The Sun said...

Think that it is important for REIT investors to note that past performance (i.e. DPU for Sabana REIT in this case) does not always equate to future performance (i.e. DPU for Sabana REIT may not rise from its current level in the future).

Just remember how Sabana Reit's DPU was close to 9 cents per lot a few years ago and has fallen to about 8 cents per lot now....

AK71 said...

Hi yeh,

Thank you very much for the well wishes. :)

Wishing you a happy and healthy CNY! Gong Xi Fa Cai! :D

Lionel said...


One key difference between both is that Sabana has most of its leases expiring in the next 3 years. Aimsamp on the other hand has about 25% of leases expiring the in the next 3 years.
Since these days the renters have the upper hand, Sabana's revenue is really in danger. It will be a real challenge to renew every thing. If they loose 30% of master leases every year in the next year, the dividend in 2018 will be 20 to 30% less.



AK71 said...

Sabana Shari'ah Compliant Industrial Real Estate Investment Trust is pleased to announce distributable income of approximately S$13.0 million for 1Q 2015, an increase of 0.6% from S$12.9 million in 4Q 2014. This translates to DPU of 1.78 Singapore cents, based on approximately 728.7 million units issued and to be issued as at 31 March 2015.


jammerwong2011 said...

Hi AK , may I know if Sabana's price at 0.845 reasonable?

AK71 said...

Hi Jammer,

My opinion of Sabana REIT has remained largely unchanged since the publication of this blog post.

Whether the current price is reasonable or not would depend on your reasoning. You have to make the call. :)

AK71 said...

I have shared in my talks why I think Sabana REIT's management are mediocre in ability and why AIMS AMP Capital Industrial REIT's management impress me more. Here is a report in The Business Times:

Singapore's ongoing economic restructuring are softening the industrial property market acutely, CEO Koh Wee Lih told reporters on Tuesday.

Which is why the real estate investment trust has taken measures to safeguard its bottom line and distributions to unitholders - by trying to pre-commit and lock in leases for longer periods, adding more profitable ventures such as data centres to its tenant mix and proactively renovating facilities to utilise untapped gross floor areas.

"There are still enquiries for space. It's just that compared to two to three years ago when our phones were constantly ringing off the hook, enquiries have slowed down somewhat. We still go out to market our properties, but we reach out six to nine months before (leases expire), in anticipation that businesses might need a longer time to decide," he said.

The other thing the Reit does to retain tenants is to roll out asset enhancement initiatives (AEI) - industry jargon for major property spruce-ups - to update its buildings to meet changing requirements and to keep the properties investment-grade.

"Everyone likes to work in a nice working environment. Particularly in a soft market, there is always this flight to quality. A few years ago, we already anticipated that there would be a slowdown, so we made an effort to slowly upgrade some of our properties. We can't do all 25 (in Singapore) at one go, but every year we pick a few and upgrade them. This year, it's 30 & 32 Tuas West Road's turn."

The S$42 million redevelopment plan is major. It will transform the two three-storey detached industrial buildings into a five-storey ramp-up warehouse facility. When completed, the occupancy rate will jump from 33 per cent to 100 per cent, with CWT as a master tenant. Its asset value will quadruple to S$61 million. Annual rental income will grow five-fold to S$4 million.

The pre-commitment of the space reduces uncertainty in the oversupplied market, where tenants may look elsewhere for cheaper alternatives. AA Reit said it tries not to build speculatively.

CWT is AA Reit's biggest tenant, contributing to over a fifth of its rental income. The Reit's strategic partnership with CWT is one reason why warehouses make up about 35 per cent of its portfolio - making it the second largest ramp-up warehouse landlord here after Cache Logistics Trust.

Mr Koh believes that while many companies such as Ceva, Kerry, Keppel, DHL and DB Schenker have built or are building their own warehouses, the market is big enough for many players, especially with the e-commerce boom.

"In the long term, I am still pretty optimistic (about warehousing prospects). In the short term, a bit of supply has come up last and this year and will probably continue into next year, but come 2017, the supply really falls off a cliff," he said.

According to JTC, some 1.2 million square metres (sqm) of warehouse space will be completed from 2015 to 2016. This drops to 378,000 sqm in 2017.


AK71 said...

Sabana REIT:

"Renewed 11 multi‐tenanted leases in 1Q 2015. Overall portfolio occupancy level
continued to be maintained above a healthy 90.0%."

This occupancy level is not going to last because:

"With approximately 7 months before the expiry of the 11 master leases, the Manager is working towards renewing or securing new master leases for 7 of them. The remaining 4 will likely be converted into multi-tenanted buildings."

Sabana REIT: Presentation dated 20 April 2015.

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