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.
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