Sabana REIT: What is a fair price and what could they do?

The last time I blogged about Sabana REIT was in February this year.

I suggested that we might want to view some assertions in cyberspace that Sabana REIT offered great value for money because of its relatively high yield and rather big discount to NAV with a dose of scepticism.

What I was most concerned about was the matter of expiring master leases, 11 in all.

Subsequent to the end of 3Q 2015, the Manager converted one building, namely 23 Serangoon North Avenue 5, from master lease to multi tenanted.

The Manager is in the final stage of negotiations for remaining 10 master leases slated to expire in 4Q 2015.

Source: Press Release.

 What is the occupancy of 23 Serangoon North Ave 5? I very much doubt that it is 100%. DPU is already lower in Q3 and it is likely to take another hit in Q4 as property income reduces and operational cost goes up because of this development.


Also, the language lacks transparency. When we hear "final stage of negotiations", we get the impression that negotiations are likely to be successful.

However, realistically, we should be prepared that more properties would be converted from having a master lease to being multi tenanted.

A lack of transparency makes it difficult for anyone to estimate what is truly a fair price to pay for Sabana REIT. Annualising Q3's DPU of 1.77c is a mistake but let's do it anyway. 7.08c. With a unit price of 78c, we are looking at a 9.07% distribution yield.

If Mr. Market is willing to pay 78c a unit, my interpretation is that Mr. Market is probably expecting quarterly DPU to decline to 1.56c or a 12% decline from 1.77c in due course. This would give an eventual 8% yield at 78c a unit.

Now, is Mr. Market right?

Well, we know the saying that Mr. Market is always right but if the DPU should decline by much more, what then?

We should be able to make a more accurate guess by end of the year and be dead sure by end of 1Q 2016.


So, if we are buying Sabana REIT with the understanding that DPU would probably reduce quite significantly and are comfortable with it, then, 78c a unit might be a fair price to pay for us.

However, if we feel that an entry price of 78c a unit with an estimated 8% yield a few months down the road would not sufficiently address some other risks such as:

1. Rising risk free rates means Mr. Market might demand a higher distribution yield. All else being equal, unit price would have to decline.

2. Rising interest rates also means a higher debt burden which would weigh down DPU. Maturing debt in 2016. $138 million. Would cost of debt increase?

3. Expiring leases in 2016. About 11.4% of NLA is expiring in 2016 and that includes another master lease.

4. Declining interest cover ratio. It has dipped below 4x and is now lower at 3.8x.

5. Possible decline in value of properties. This would impact gearing level.

We won't be wrong to ask to what degree has a unit price of 78c a unit taken all these in?

If Sabana REIT is confident that its NAV/unit of $1.04 or so is realistic, then, I would like for them to sell some of their properties. That is probably the best way to see if the valuations are realistic. 

Of course, the reason for this suggestion is really to unlock value for the shareholders and strengthen the REIT's balance sheet.


Related post:What is the right price to buy into Sabana REIT?

Sabana REIT's Presentation in September 2015 for investors: here.

SP Services say total amount payable is $0.00! (AK uses his air con more but keeps the bill in check.)

(Update 4 Jan 17): 
AK has denied SP Services some revenue! Happiness is a utility bill that looks like this.

All thanks to the really cool weather recently (and not the miserable reduction in electricity tariff).
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Since having my own place once more, I have had discussions with friends on more domestic topics like the household utility bill. In all these discussions, I discovered that my utility bill is relatively low.

My consumption is below the national average for my house type, apparently.

What about my bill in dollar terms?

It has remained more or less the same compared to my utility bill a few years ago when I had my old place and stayed there for 4 years or so, $100 a month, give or take a few dollars. I think this is quite remarkable.

I absolutely cannot live without the air con being on at home. If I am home, the air con and air purifiers are on. Since I am home for many more hours now each day compared to a few years ago, the air con is on for many more hours per day too.

I also watch more TV now as I have more free time. I like watching the Travel Channel, HGTV, Discovery Channel, National Geographic and the History Channel. 

I have a 40" Full HD LED TV now compared to the 26" LCD TV I had in my old place before I replaced it with a 32" LED a year before I sold the place. I think my many TV watching hours now should consume more electricity.

How is it that my utility bill has not gone up much?

I think it is fair to say that the air con probably consumes more electricity than other electrical appliances at home. So, the first thing to do is to make sure to insist on having the energy saving Invertor technology. 

4 ticks, nothing less.

Then, I will usually set the air con temperature to 24 degrees centigrade. On a very warm day, maybe, 23 degrees centigrade.  

The lower the temperature we set, the higher the energy consumption. So, 23 degrees centigrade is usually the lowest I would go.

I have a friend who sets the temperature to 18 degrees centigrade at home as the norm. That is freezing and sends the energy bill through the roof!

Well, since moving to my new place, I got acquainted with my new Invertor air con which has a neat dehumidifier function. This function removes moisture from the air.

Often, we feel warm because of the high humidity level in our climate. The human body is not able to cool itself as well in a humid environment. If we are able to lower the humidity level in a room, our body will feel cooler naturally.

If we set the air con to dehumidifier mode, it lowers the humidity level in the room to about 60%. This is much lower than the usual humidity level in Singapore.

What does the symbol look like? 

A couple of  water drops. Unfortunately, you won't find this mode in older air cons.

If you have Invertor air cons at home and if they are quite new, they should have the dehumidifier mode. If you cannot live without the air con on at home, try this mode. It should lower energy consumption and you should see some savings.

When I go to bed, I would switch the air con back to the regular mode, the one with the snow flake symbol. 

This lowers the humidity level as well as the temperature in the room. 24 degrees centigrade, of course.

It keeps the room cool enough and I don't even need to use a blanket. Just need to wear socks to bed. 

I hope I have not put anyone to sleep with this blog post. Zzzzzz.
Related posts:
1. Photos of AK's home.
2. What can we do to survive the haze?