Sabana REIT: Convertible Sukuk.

Some time back, I wrote about how perpetual bonds could be a good thing for REITs if they could use the funds raised to acquire yield accretive properties. Imagine borrowing at a lower interest rate to invest in a property with a NPI yield higher than the cost of debt. This is good news for existing unitholders.

Sabana REIT has announced a Convertible Sukuk which will raise S$80m. What is Sukuk? The easiest way to understand it is to think of it as an Islamic Bond. So, a Convertible Sukuk is a Convertible Bond.

The Sukuk will carry a profit rate of 4.5% and are due in September 2012. If the conversion to new units takes place, there will be 67,040,979 new units issued (about 10.5% of all units currently in issue).

Read announcement: here.

Sukuk holders could exercise the option to convert to new units after 9 November 2012. The initial conversion price is $1.1933 per unit. This is some 5.6% higher than the closing price of $1.13 in the last session.

If my understanding is correct, Sukuk differ from conventional bonds in that they do not take interest payment but, instead, they will take partial ownership of the business or assets. This is why the coupon of 4.5% is referred to as profit rate. Interesting.

Read announcement: here.

Property to be purchased:
23 Serangoon North Avenue 5.

Remaining land lease: 44.2 years

Purchase price: S$61.0m

Read about the property to be acquired: here.

I feel that the cost of debt at 4.5% per annum is somewhat pricey but Sabana REIT is a smallish outfit and the higher profit rate is to compensate for perceived higher risk, I suppose. It is similar to what Saizen REIT pays for some of its bank loans, for example. So, no big issue here.

I am not able to find information on the NPI which 23 Serangoon North Avenue 5 will generate for the REIT but I am assuming that it is yield accretive as announced by the manager. So, the NPI yield should be much higher than the cost of debt of 4.5% as the REIT's current portfolio has an average NPI yield of 7.3%. The purchase should be DPU accretive as well.

If the Convertible Sukuk are all converted to new units in the REIT, there will be a dilutive effect as they represent some 10.5% of the total units in issue now. However, the benefit is that they become equity in the REIT and not debt. This will, then, have a benign effect on gearing.

Do we stay invested and take the good with the bad or do we take our money elsewhere?

Related post:
Sabana REIT: 2Q 2012 DPU 2.27c.

First REIT: Acquisitions in Manado and Makasar. (Amended)

First REIT is acquiring two properties from its sponsor, PT Lippo Karawaci Tbk.

The two are Siloam Hospitals Manado & Hotel Aryaduta Manado at S$83.6 million, and Siloam Hospitals Makassar at S$59.3 million. The prices are at a discount of 10.78% and 9.81% to valuations, respectively.

The purchases will be funded through debt and a private placement.

Some pro forma numbers:

Total asset size:
S$782.2m or an increase of 26.4%.

NAV/unit: 84c.

Annual DPU: 7.45c. 6.77c.

Read press release: here.

What really interests me is the DPU here. An annual value of 7.45c 6.77c will approximate 1.86c 1.692c per quarter.

Regular readers will remember that I said a safer way to value First REIT was to use a quarterly DPU of 1.6c as it would remove the special distributions resulting from the sale of the REIT's Adam Road property. This is especially so if the management should be tardy in moving to improve the REIT's income.

Well, the special distributions have run out but the proposed acquisitions will take in S$14.1m in annual net rental income which is equivalent to a quarter of the REIT's annual revenue from its current portfolio. Therefore, the proposed acquisitions will keep the REIT's DPU more or less unchanged which would, in turn, lend support to its much higher unit price today. Now, I wonder if this is enough to lend support to its much higher unit price today.

At last session's closing price of $1.03 a unit, we will be looking at a pro forma distribution yield of 7.233% 6.573%. This is probably still attractive enough for many in the current low interest rate environment.

Related post:
First REIT: 2Q 2012 DPU unchanged.