I have written yesterday, providing some thoughts on Sabana Industrial REIT’s (9.3% dividend yield) very busy 2016 year end of acquisitions, divestment and master lease renewal.
What was missing was how Sabana would finance the acquisition.
This morning the financing details are out.
Sabana will finance the acquisitions by raising SG$80 mil via rights issue:
- For each 100 units, you can subscribe to 42 units
- Rights issue will increase number of outstanding units by 310 mil
- The rights issue is renounce-able, which means that, if you do not wish to participate, you can wait for ex-rights, then sell off your rights (which will be subsequently listed on the SGX) to prevent the dilution
Fully funding by equities and no debt issuance
Recall in my previous article that net of the recent disposal of Pandan Loop, Sabana requires about SG$67 mil.
This Rights Issue will raise SG$76 mil, net of 3.4 mil in rights raising fees.
Based on my previous analysis, a full equity raising with no debt issue is likely to be not accretive to current rental income performance.
Recall that the net property income yield of 2 of the acquisitions likely will have an upper bound of 8.5% yield before REIT manager management fees.
The current dividend yield of Sabana is 9.3% which is higher than the new assets purchased. We will discuss more of this later.
How Accretive is this rights issue and acquisition?
I usually use this trusty spreadsheet of mine to do a quick check on the immediate accretive nature of rights issue and placement:
There are 3 sections:
- current situation, which is prior to the announcement,
- the rights issue, which is how much equity and debt will be added and then
- aggregate, which is the likely end result after this rights issue.
Always frame in your head what is the current situation, what is the deal about, how would the company look after this.
Prior to the rights issue, the likely annualized dividends per share is $0.048, bringing the dividend yield currently to 9.4%.
The annual distributable income is $37 mil based on the last quarterly report.
In the Rights Issue section, this is a 100% equity funded acquisition with no debt.
What is the increase in net property income or income available for distribution?
Its frustrating when they do not provide this information. Or perhaps that is the point. Not to provide any. Even Croesus Retail Trust, who internalize their manager, provided some guidance there.
There are some rule of thumb we can try to work out.
Recall in my last article, we tend to think majority of the 3 acquisition will have a master lease or anchor tenant. If its a master lease, Sabana is likely to earn 100% or 90% of the gross rental income:
- General Cars Fleet will lease with income support to meet SG$3.1 mil on a SG$36 mil acquisition. The NPI yield here is 8.6% or less
- Freight Links will lease with income support to meet SG$2.1 mil on a SG$25 mil acqusition. The NPI yield here is 8.4% or less
- Singapore Handicrafts purchase is SG$20 mil with no announcement of gross rental income.
Suppose we use an average NPI yield that they are able to fetch from General Cars and Freight Links as the so-called market rate. Then the Singapore Handicrafts rental income would be $20 x 0.085 = $1.7 mil.
The total net property income, the upper bound of it can be estimated to be 3.1 + 2.1 + 1.7 = SG6.9 mil.
Usually, the REIT manager fees is about 1% of asset under management (sometimes could be as low as 0.7%). Suppose we deduct $75 mil (this is less than purchase price as the actual book value is less than transaction amount) x 0.01 = SG$0.75 mil.
The net rental income from the acquisitions could be 6.9-0.75 = SG$ 6.15 mil.
Hence in the Rights issue section, the Income increment is roughly SG$6.17 mil. Based on the rights issue raised, the new capital would yield 7.7%.
How Sabana will look after the Rights Issue
In the aggregate section:
- the aggregate dividend yield as a shareholder will go down from 9.4% to 9.11%
- debt to asset will go down from 41% to 38%
As what I have suspected, the way this deal is finance, all else being equal, shareholders will be better off with the manager not buying anything.
The TERP Price
TERP (Theoretical Ex-Rights Price) is a term you need to be familiar with when it comes to renounce-able or non-renounce-able rights issue.
When you add shares to the existing shares, there will be dilution. The share price will go down.
You would need to know theoretically what is the price after ex-rights.
In Sabana’s case, the announcement list it as $0.43. My google sheet list it at $0.44, which is not too far off.
Understand the Rights issue process. There is a sequence of events leading up to the new shares deposit into your account.
Don’t be surprised by it.
The time table
The series of events are usually listed in the time table.
Management did not provide a Strong Case for the Acquisitions
As a corporate warrior as well, I know the importance of controlling the narrative when communicating to others. In most REITs, they do provide a good justification why some decisions have to be made. They are often made with some quantifiable figures.
Shareholders would be befuddled why there isn’t a DPU or Dividend Yield Projection done.
The narrative usually have to put in context with the current situation of the company.
If your company is doing well, the narrative will be different then when the shareholders have been waiting for a long time and not seeing good results.
In the case of Sabana’s acquisition, the narrative centers on:
- Enhances the WALE of the portfolio
- Acquiring 3 quality assets
- Increase portfolio size, strengthen the balance sheet, increase functional flexibility
- Improve trading liquidity
- The Sponsor, the Manager, Singapore Enterprises, Mr. Khua Kian Keong and Mr. Khua Hock Su will each subscribe in full for their provisional allotment of the Rights Units, which in the aggregate represents approximately 12.13% of the Rights Issue
- The Sponsor will subscribe for up to 25,942,139 Additional Rights Units (representing up to approximately 8.35% of the Rights Issue) to the extent that they remain unsubscribed after satisfaction of all applications (if any) for Excess Rights Units.
The word quality have been thrown around too much and its subjective based on assessment. I wouldn’t consider income supported REITs to always be quality, considering at some point, when the REITs are up for renewal, this will come back to bite them. ( See Cache Logistics Long WALE issues when they come to an end here )
Income support is useful when the future outlook is more sanguine. It depends on luck sometimes.
For the existing shareholders to stay invested, they need to assess that while the WALE has been lengthen on the average, a sizable chunk of existing properties will be up for renewal next year, with much supply coming on board.
The rental prices will come under pressure.
The direction taken, not to issue debt, is so that in the event where the value of the properties fall, they would not breached the aggregate leverage limit.
When less is being said, this may indicate these rental cash flow is to buffer for some loss in rental from existing portfolio.
The management took time to package these acquisitions together, with the rights issue. Your question to the management is, would acquisitions in the middle of next year result in a better deal for shareholders?
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