Laugh with AK and have a happy Chinese New Year!

As promised, here are some photos taken in the evening of 13 February 2015 (Friday):

I think the flu bug this year is especially virulent!
Remember your mask. Don't leave home without it!
Hey, who is the other fellow seated next to Sean? O_o

AK demonstrating Chinese Kung Fu from Foshan.
What? You don't recognise the famous dragon claw?
Not the left hand. The right hand! -.-"

Group photo with Sean, Ivan, Leong, Paul et. al.
I think everyone had fun that evening.
Gong Xi Fa Cai! :)

福星高照!

AK wishes all readers a very happy and prosperous Chinese New Year! Huat ah!

Lucky number: 8854.

Related post:
Eat bread with ink slowly.

What is the right price to buy into Sabana REIT?

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.