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Sabana Industrial REIT Does 42 for 100 Rights Issue to Fund Non Accretive Acquisitions

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:

  1. For each 100 units, you can subscribe to 42 units
  2. Rights issue will increase number of outstanding units by 310 mil
  3. 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:

  1. current situation, which is prior to the announcement,
  2. the rights issue, which is how much equity and debt will be added and then
  3. 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:

  1. 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
  2. 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
  3. 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:

  1. the aggregate dividend yield as a shareholder will go down from 9.4% to 9.11%
  2. 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:

  1. Enhances the WALE of the portfolio
  2. Acquiring 3 quality assets
  3. Increase portfolio size, strengthen the balance sheet, increase functional flexibility
  4. Improve trading liquidity
  5. 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
  6. 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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JERRY LOW

Saturday 21st of January 2017

We want to remove Sabana REIT manager.

We are doing it because the manager is bad. In your analysis, you dropped hints that you do not like the purchases and the way they are financed. They are not yield accretive and it would have been better if they stay put. We read what you and others wrote and they resonate with how we feel. That is how and why we started this.

We do not want to buy out the management. We want to remove them. What we want to do is codified and fully endorsed by MAS. We want to internalize not with the existing management but a whole new internal set up (All REIT IPOs start will a new set up). MAS confirmed they do not object internally structured Manager on 9 Oct 2014,

You know this company well. You know how bad the managers are. You know it is a uphill task. And above all, it is just a gathering of 70 keyboard warriors. But if we succeed, you know it is for the benefits of the unitholders. This can change the landscape of REITs in Singapore. I really hope you can consider supporting our clause. tq

Richard Teo

Saturday 21st of January 2017

There is a proposal by Sabana unit holder to change the structure of REIT manager to better align the interest of manager with the unit holders. Please refer to the following:

{linked removed}

Kyith

Saturday 21st of January 2017

hi Richard, I have removed the link but perhaps you can tell us why the unit holders are doing this. I am aware of what they are trying to do. Perhaps you can shed light as to how they are going to buy out the management if it gets approved. Would the new manager do a better job sourcing for tenants compared to the old one with its unique mandate.

Chan Hong Lai

Monday 9th of January 2017

tks for your great analysis.

so can i confirm that we can sell off the rights from 26th Jan onwards if we dont plan to subscribe?

Kyith

Monday 9th of January 2017

actually if i am right the rights have already start trading, you can sell off if you do not plan to subscribe

CY

Thursday 22nd of December 2016

I am trying to understand the "last day of cum rights trading of 23 Dec" does it mean if I buy on 22 Dec at the price of 0.435, I will still be entitled the addition rights issue?

Kyith

Thursday 22nd of December 2016

Hi CY, i believe it is 23 Dec it is still entitled to buy for the traditional rights issue, or that they will give you a reounceable rights

sgdividends

Thursday 22nd of December 2016

Kyith,

Just to see if you agree,for rights, the share price corrects downwards when the announcement is made and not when it becomes ex-right?

Anyway the 0.258 seems a very high dicount to the TERP price of 0.44 which makes it quite attractive actually to buy 1 lot, apply a truckload of excess, since i am not sure that allocation is a function of odd lots ( bullythebear) especially when its such an unloved counter now. Excess should be fully allocated in this situation.

Kyith

Thursday 22nd of December 2016

hi sgdividends, i think there can be some gambling element involved here. what bully the bear stated is that the rights is so badly received that if you apply for only 100 shares and the rights entitled, you can apply for much excess rights and get them. your cost will be much lower.

The terp price will be reduced further due to the recent share price fall.

another way is if the rights start trading and its at a discount, your price might be even lower than terp price.

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