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.

Overpaid for our investments in business trusts?

As investors, we do our best to look ahead but because we have imperfect knowledge, what we can see is probably just our best guess. Things are usually clearer on hindsight.

As income investors, we can be too concerned with yields sometimes and it does not help that certain consultants also put their focus on yields. To be fair, this is a common pitfall and I fell into such pits in my early days as well. However, consultants are professionals and, as a consequence, sometimes, they have a bit more reach. We should be more wary.

I do not have perfect knowledge. I am not a professional. I am just your average retail investor who has opened his fair share of cans of worms. I just share my thoughts and experience here in my blog but, remember, that they are not sacred in any way.

On 20 June 2014, I wrote a piece in response to a report which quoted a consultant as saying "If you want to invest in business trusts, you shouldn't be looking so much at capital gain... your objective is more dividend yield. Prices do come down, but you actually still get your dividend yield."

I took issue with that statement and listed 5 reminders to myself:

1. Dividend yield is a key factor, not the only key factor.

2. Keep an eye on possible capital gain or loss.

3. Look at yield on investment based on current price.

4. Could it be that we are taking back our own money?

5. Does the yield sufficiently compensate us for the risk?

To read the complete blog, refer to related post number 1 at the end of this blog.

Over the weekend, an article in The EDGE said:

"There is no doubt now that investors who bought shares in Hutchison Port Holdings Trust (HPH Trust) at its IPO four years ago paid Hong Kong tycoon Li Ka-shing's corporate stable far too much."

I did not apply for shares in HPH Trust's IPO.

Actually, I have not applied for shares in any IPO for many years. I think avoiding IPOs has generally been more rewarding for me than not. So, this might be a good rule of thumb for me to stick to.

Similarly for Croesus Retail Trust's IPO, I avoided although I was interested and watched in disbelief as the unit price was chased to a high of $1.18. Its yield was being compressed so much as its price shot through the roof and some people still said it was attractive enough to buy. Did they know something I didn't? I wondered to myself, self-doubt settling in.

Well, this is just a short blog post to remind myself that REITs and business trusts are relevant tools for income investors and that there are many things to look out for, not just their distribution yields. Look at yields only and I could end up overpaying.

Related posts:
1. High yielding business trusts: A discussion.
2. HPH Trust: Storm clouds over a safe harbour.
3. Croesus Retail Trust: Motivations and risks.