Yesterday Sabana released their first quarter 2014 results, and it was a poor result.
They were very hard hit when their master-tenanted properties lost much of their individual tenant such that the main tenant doesn’t renew with Sabana. Now they have to take over the leasing.
When the news came out, together with last years correction, many were presented with this ‘value opportunity’ for a high yield play, that is likely to be ‘misunderstood’
I’m just afraid that the mom and pop investor are usually taken in by the exceptional prevailing yield of 8%, that they may think a lot of things will work itself out.
The market sometimes sell down a REIT because the general investors do not have the same time horizon as you, and thus misunderstood.
This may present a good opportunity.
But at other times, the important fundamental determinant may have shown deterioration. In this case it is the ability of the manager and the power of this manager.
No doubt, not all industrial reits result have been fully released, but one manager in the same category as Sabana, that is Cambridge release their results yesterday and it was ok.
Incidentally, Sabana’s manager was Cambridge old manager, who made quite a fair bit of missteps in the GFC.
Focusing on the industrial REITs on my Dividend Stock Tracker, you will realize the prevailing yield is not as attractive versus peers anymore. The net debt to asset is also amongst the highest (note Aims Amp have the highest since they have some AEI ongoing, it is rather close to 37% instead of 25%)
Evaluation of REIT by yield alone is dangerous. At the end of the day, it is a group of finance folks deploying money and leveraging to buy and rent properties, sometimes selling. The manager plays an important role here.
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HW
Thursday 17th of April 2014
Hi Kyith,
I'm not sure if Sabana lost much of the individual tenants when they took over the 4 master leases on 25 Nov 13. Things are clearer if you compare this quarter with the immediately preceding one.
From presentation slides for 4Q 2013 and 1Q2014: 4Q 2013 Overall portfolio occupancy = 91.2% (Master Lease = 100%, Multi-tenanted = 78.4%) Gross revenue = 24,824 Net finance cost = (5,636) Property expenses = (4,949) Units on issue = 691,959,462 Leverage = 36.9% Investment properties = 1,211,430 Distributable income = 15,127
1Q 2014 Overall portfolio occupancy = 90.6 % (Master Lease = 100%, Multi-tenanted = 76.9%) Gross revenue = 24,570 Net finance cost = (6,708) Property expenses = (6,185) Units on issue = 691,959,462 Leverage = 37.0% Investment properties = 1,211,977 Distributable income = 13,044
I would consider the gross revenue (rental) for both 4Q 2013 and 1Q 2013 to be roughly stable. There is no increase in units on issues and asset base is the same.
The decrease in distributable income of 2083 is largely due to a spike in (net finance cost + property expenses = 2308). About 1M of which is a one-time cost associated with early refinancing.
What management meant by "lower portfolio occupancy" is that the properties under master lease were considered as 100% occupied previously, but will be reflected as the current/actual occupancy if considered now as multi-tenanted. The rental income appears to be somewhat unaffected but are no longer triple net. So rental remains more or less constant on transition while expenses increase quite a lot.
As of now, the weighted average lease term to expiry is 2 years (for master lease). Master lease comprises 59.3% of total portfolio by NLA. Going forward, there may plausibly be scope for upside on expiry of master lease if management manages to lease out whatever vacancies there are, or if the prevailing master lease rents are below market. In the 4 months since Sabana took over the master leases on 25 Nov 13, the multi-tenanted occupancy has further fallen from 78.4% at 31 Dec 13 to 76.9% at 31 Mar 14. This coupled with a large rise in property expenses does not bode well for investors, especially if the same situation repeats with the other master leases' expiry.
I am also somewhat unsure about availability of Shari’ah Compliant borrowing - being a more restrictive / specialised debt type, would it be harder to source than plain vanilla borrowing, especially during a financial crisis?
(Not vested)
Kyith
Saturday 19th of April 2014
hi HW, nice work there. Certainly better than what i would have done. The contrarian will think that this is a solvable problem. And to be fair after this, i thought that even the other industrial reits will run into this problem once in a while.
the more pressing issue is whether a high cost manufacturing place has some longer term issues.
lzw
Thursday 17th of April 2014
Sabana just implemented a distribution reinvestment scheme. Their cash balance at 2014 Q1 end was down to $11.398m, an almost one-third drop from 17.084m the year before.
Kyith
Thursday 17th of April 2014
Have they broadcast the take up of the reinvestment scheme