Sabana REIT: Buy but remember the Sukuk.

In November 2013, I said that I reduced my investment in Sabana REIT and moved the funds into Croesus Retail Trust, believing that a reduction in my exposure to industrial properties in Singapore was sensible. At the time, Sabana REIT was trading at about $1.09 a unit.

Then, in January 2014, I wrote a piece saying that Sabana REIT's quarterly results were within my expectations and that trading at $1.07 a unit, we could see its unit price fall to $1.03 once the REIT went XD if Mr. Market were to demand a 2% premium over the market leader, A-REIT.

I also said that although I was not buying at $1.07, neither was I selling. The reason was because Sabana REIT's relatively low occupancy of 91.2% could improve over time. So, we could see DPU and distribution yield improving, everything else remaining equal.

How much of an improvement would we see? Well, assuming that Sabana REIT improved occupancy of its properties to 96% and that DPU improved proportionally, we could see an annualised DPU of 9.2c. This would give us a yield of some 8.6% at its NAV of $1.07 a unit.

At a price of $1.03 per unit, we are just a whisker away from a 9% yield. It would be 8.93%. This is rather attractive and at $1.02 a unit, we see a prospective distribution yield of 9.02%. $1.02 a unit also coincides with a technical support provided by Fibo retracement lines.

So, it is not surprising to see investors buying again at current prices even though, technically, I see a stronger support at 97.5c or 98c a unit. Do I really think unit price could go that low? This is just what I see in the chart as a possibility. I don't know if it would happen.

However, remember the $80 million Convertible Sukuk due on 24 September 2017? In 2012, when I blogged about this, I said that if all should be converted to new units in the REIT, they would add some 10.5% to all units in issue. This would dilute existing stakeholders' interests but the debt would disappear.

"During the financial year ended 31 December 2013, certain Converting Sukukholders had converted an aggregate principal amount of $7.5 million. As a result, the Group elected to issue 6,285,090 units at the then conversion price of $1.1933 to these Converting Sukukholders."
Source: Full year 2013 report.

The bond holders pay a higher than market price and the REIT's gearing level declines at the same time. Seems like a good deal for the REIT. Actually, it makes sense to the bondholders too as they are paid a coupon of only 4.5%. Even converting to units at $1.1933 would mean enjoying a distribution yield of some 7.3%. Of course, this is leveraged yield. So, not really comparable.

Anyway, we should not worry about what these bond holders should do. Instead, we should think about how would their actions impact us as investors in the REIT.

If all the bond holders should convert to units by 2017, be prepared for a further 8.8% dilution but the REIT's gearing would then decline to a lower 33% thereabouts. Is this a good thing?

Well, it would mean that any increase in DPU from improving occupancy level could be diluted and we might not see much of a difference from current levels. If there should be zero improvement in occupancy level, which I think unlikely, then, we could see DPU reducing to 8.08c which means a yield of 7.84% at a unit price of $1.03 which makes a unit price of 98c a unit seems less far fetched.

Of course, if the convertible bond holders decide not to convert to units anymore and wait for maturity in September 2017, then, expect the status quo, everything else remaining equal.

What the bond holders would do is anyone's guess but what are investors in the REIT to do? Well, add to long positions at $1.02 to $1.03 a unit if we like but bear in mind the convertible bond and the possible effects. Are we comfortable with it?

In my opinion, prices of $1.02 and $1.03 a unit are not bad but don't be surprised if unit price should decline to 98c. So, always have a war chest ready.

Related posts:
1. Sabana REIT: Convertible Sukuk.
2. Added Croesus Retail Trust and reduced Sabana REIT.
3. Sabana REIT: After the 4Q 2013 results, am I buying or selling?

AIMS AMP Capital Industrial REIT: The rights' value.

With AIMS AMP Capital Industrial REIT's 7 for 40 rights issue on the horizon, suddenly, I feel nostalgic. This is a REIT which I have been invested for many years.

Looking back, my very first blog post on the REIT was on 31 Dec 2009. I had only been blogging for a few days back then.

At the time, the REIT was trading at 20.5c a unit ($1.025 post consolidation). It offered a distribution yield of about 10% and I said, "I bought a large chunk of MI-REIT at 20.5c after the recapitalisation exercise. At that price, it gives a yield of about 10%. It's trading at about 30% below NAV. It has the lowest gearing amongst Singapore industrial REITs. For anyone looking for high yield at a bargain, this is a BUY even at 21.5c."

I kept on accumulating units in the REIT and when it had a 7 for 20 rights issue in August 2010, I took part enthusiastically. After all, my calculation then showed that, on an annualised basis, the rights units were going to enjoy a yield of 13.42%. The rights were offered to unit holders at 15.5c a unit (77.5c post consolidation).

Of course, we should know the value of our investments. Otherwise, we won't know if it is worth buying more or not. On 11 December 2010, I did a valuation exercise for the REIT and decided that the fair value was 25c a unit ($1.25 post consolidation). Totally subjective, I am sure.

That meant that, by my reckoning, even at 24.5c a unit, it would still have been a fairly good buy. So, when Mr. Market went into a depression later on and offered to sell units of the REIT at lower prices, it was only natural that I bought more.

The value of the REIT had remained the same. So, a lower price meant that it had become cheaper.

Specifically, I bought more units from August to December 2011 when such a depression took place. By then, the REIT had transformed into a stronger entity and there was no reason for it to trade at lower prices but it did.

On 14 December 2011, the last time I added to my long position in the REIT, I paid 93.5c a unit which was just a little shy of very depressed prices last seen in 2009. That worked out to be just 18.7c a unit, pre consolidation!

It didn't take much to know that buying the REIT in December 2011 was a better deal than buying it during the lows of 2009. Why? Pay almost the same price for a financially stronger REIT today than for a weaker one 2 years ago? Felt like a sensible thing to do.

The future of the REIT was also very promising as they embarked on a redevelopment program and I was able to conclude that by early 2014, two years on, the expectation was for a positive DPU impact, everything else remaining equal. To anyone investing for income, the REIT was, quite simply, a buy and I said to accumulate on weakness.

Regular readers might remember that I said I am not averse to trading around my long positions. I sold some of my investment in AIMS AMP Capital Industrial REIT in the following year when its unit price rose but I retained most of my investment in the REIT as part of my core investments for passive income. With past distribution yields on cost ranging from 10.18% to 13.42%, I think that my investment in the REIT has not done too badly.

The current rights units to be issued at $1.08 a unit will probably be the most expensive units of AIMS AMP Capital Industrial REIT's I have ever bought. At $1.08, I am expecting a prospective distribution yield of 8.66%. A very rough back of the envelope calculation shows that this could increase to 9.26% (taking into consideration income from Optus Centre, the redevelopment of a property in Defu as well as savings in financial expenses).

The prospective distribution yields of 8.66% to 9.26% for the rights units are rather much lower than the distribution yield of 13.42% for rights units offered in its 2010 rights issue. So, this rights issue seems relatively less attractive.

However, if we believe in the management and if we believe that a prospective distribution yield of 8.66% to 9.26% is sufficiently attractive, we should take up our entitlement and apply for more excess rights. Otherwise, we could think of selling our rights entitlement.

For anyone who is thinking of buying the nil-paid rights, although the theoretical ex-rights price (TERP) was calculated to be $1.365 which meant that the fair value for nil-paid rights should be 28.5c a unit, to get the same pre rights distribution yield of some 7.77%, the highest price we should pay for nil-paid rights should be around 12c per unit. Of course, the lower the better but not higher than 12c per unit.

Nil-paid rights start trading 2 days from now.

Know the value and we will know how much we should be paying. Good luck to us all.

Related posts:
1. AIMS AMP Capital Industrial REIT (MI-REIT).
2. AIMS AMP Capital Industrial REIT: Rights issue.
3. AIMS AMP Capital Industrial REIT: Revised DPU and fair value.
4. AIMS AMP Capital Industrial REIT: 7 for 40 rights issue.
5. AIMS AMP Capital Industrial REIT: Optus Centre.